Denny was neither bankrupt nor insolvent but was short of cash and could not make the mortgage payments on his personal residence in 2013.The bank that held the mortgage agreed to reduce the principal on the debt from $100,000 to $80,000 so that Denny's monthly mortgage payments could be reduced to a manageable amount.Denny also had a vacation home with a mortgage whose payments were beyond his means.The mortgage holder on the vacation home agreed to reduce the mortgage from $60,000 to $50,000.The value of the personal residence was $80,000 and the value of the vacation home was $45,000 at the dates of the debt reduction.

Question

Quizplus · Accepted Answer

According to the tax law, when a taxpayer's debt is reduced below what it owes, the amount of the reduction is generally considered income and must be reported on the taxpayer's income tax return. Therefore, Denny is required to recognize $10,000 income from the reduction in the mortgage on the vacation home. However, there is no income to be recognized for the reduction in the mortgage on his personal residence, as the reduction in the principal does not exceed the fair market value of the property.

Denny Was Neither Bankrupt nor Insolvent but Was Short of Cash