Jolie purchased her residence in 2011 for $500,000 by borrowing $450,000. In 2014, she becomes unemployed and can no longer afford to make the full monthly payment on the mortgage. When the mortgage balance is $430,000, the bank agrees to reduce her mortgage to avoid foreclosure. What is Jolie's basis in her residence if the bank agrees to reduce the mortgage on the residence to $300,000?

Question

Quizplus · Accepted Answer

Jolie's basis in her residence is the amount she paid for it, plus the cost of any improvements she has made. In this case, Jolie paid $500,000 for the residence and has not made any improvements. Therefore, her basis in the residence is $500,000. When the bank agrees to reduce the mortgage on the residence to $300,000, Jolie's basis in the residence is reduced by the amount of the reduction, which is $130,000. Therefore, Jolie's basis in the residence after the mortgage reduction is $370,000.

Jolie Purchased Her Residence in 2011 for $500,000 by Borrowing