Harold bought land from Jewel for $150,000.Harold paid $50,000 cash and gave Jewel an 8% note for $100,000.The note was to be paid over a five-year period.When the balance on the note was $80,000, Jewel began having financial difficulties.To accelerate her cash inflows, Jewel agreed to accept $60,000 cash from Harold in final payment of the note principal.

Question

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Harold is not required to recognize gross income, but must reduce his cost basis in the land to $130,000. This is because the amount paid to Jewel is less than the face value of the note, but it is still a payment in full satisfaction of the debt. Since Harold paid $60,000 to discharge the remaining amount on the note, there is no cancellation of indebtedness income to Jewel. Harold's cost basis in the land is reduced to reflect the amount paid to satisfy the note.

Harold Bought Land from Jewel for $150,000