Filed chapter 7 , II are 1 - mortgage on home , 2 - mortgage on rental 3 - unsecured cc . All debts were discharged , zero obligation . Bank has liens on homes and will get their money if / when those properties are sold . For tax purposes I have to file form 982 and report discharged debt which in essence can be excluded from gross income . Per my bankruptcy attorney I don't have to pay any taxes on the discharged debts . Net result - wash . ( per bk attorney ) . Tax Time - Here's what I don't understand - " reduction of tax attributes . " So now my accountant says I have to reduce my cost basis by the amount discharged . Therefore in the future if I sell the house I could potentially pay capital gains tax . What ? If I sell the bank get all the money to cover the liens . Why do I have to pay cap gain ?I truly don't understand the reduction in basis. Ch 7 relieved me of the debts. If Ch 7 relieved me of the debts AND gave me the house as well - I WILL GLADLY PAY CAP GAINS at disposition of the homes. Yes I am walking away debt free but because the bank still has liens on the homes, the "creditor" has not lost or will lose any money! So why must I do a "reduction in tax attributes?" I don't understand. Can someone shed some light on this? Who supercedes who? Bankruptcy courts or IRS? Is my accountant wrong in this case? Is there a way around where another form/filing washes the basis reduction? Btw - we're still paying the mortgages on both primary home and the rental property still has a tenant. Both mortgages are still being paid post bankruptcy as we still want to stay in the home. Any comments or suggestions is greatly appreciated.