Gold Company was experiencing financial difficulties, but was not bankrupt or insolvent. The National Bank, which held a mortgage on other real estate owned by Gold, reduced the principal from $110,000 to $85,000. The bank had made the loan to Gold when it purchased the real estate from Silver, Inc. Pink, Inc., the holder of a mortgage on Gold's building, agreed to accept $40,000 in full payment of the $55,000 due. Pink had sold the building to Gold for $150,000 that was to be paid in installments over 8 years. As a result of the above, Gold must:

Question

Quizplus · Accepted Answer

When a mortgage is reduced, the difference between the amount owed and the amount paid is considered income for the borrower. Therefore, in this case, Gold must include the $25,000 reduction in the mortgage principal in gross income.

In addition, when a mortgage is paid off for less than the full amount owed, the borrower has a capital loss equal to the difference between the amount they paid and the adjusted basis of the property. In this case, Gold's adjusted basis in the building was $110,000 (the original purchase price of $150,000 reduced by the $40,000 paid to Pink). Therefore, Gold must reduce its basis in its assets by $15,000 ($40,000 - ($150,000 - $110,000) = $15,000).

Gold Company Was Experiencing Financial Difficulties, but Was Not Bankrupt