Edward and Inez Purchased Their Home in 2002 for $600,000

Edward and Inez purchased their home in 2002 for $600,000. They financed the purchase with a $550,000 mortgage. In 2014, they fall upon hard times and cannot make the mortgage payments. They sell their home for $425,000. At the time of the sale, the mortgage balance is $450,000 on their home. The mortgage company cancels the remaining debt. Which of the following is true? I Edward and Inez will recognize no income on the cancellation of the mortgage loan. II Edward and Inez will realize a loss on the sale of their home.

A) Only statement I is correct.
B) Only statement II is correct.
C) Both statements are correct.
D) Neither statement is correct.