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 when Jewel accepted $60,000 in final payment of the note principal, Harold effectively paid $90,000 for the land ($50,000 + $40,000), which reduces his cost basis in the land. However, Harold does not have to recognize gross income because he paid off the debt before it was due and did not receive any forgiveness of debt from Jewel.

Harold Bought Land from Jewel for $150,000