Harry was experiencing financial difficulties and could not make the mortgage pa

Question

Harry was experiencing financial difficulties and could not make the mortgage payments on his home. The mortgage holder agreed to reduce the debt principal by $50,000 because the real estate market was depressed. Assuming that Harry is not bankrupt or insolvent, would the tax consequences differ under the following circumstances?
a. The mortgage is held by the person who sold him the property
b. The mortgage is held by the financial institution that made the loan for the purchase of his residence.

Explanation / Answer

Solution:

Harry needs to identify and resolve the following issues:
• Is the friend forgiving the debt as a gift to Harry
• Did the mortgage holder sell the property to Harry
• Is Harry insolvent or undergoing bankruptcy proceedings
• If Harry must recognize income from the debt cancellation, does he have losses to
offset
• May Harry reduce the basis of the asset rather than recognizing income

the tax consequences will not differ under these consequences

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