Netelli Inc. owned a tract of land with a $175,000 basis that was subject to a $228,500 nonrecourse mortgage. Netelli defaulted on the mortgage, and the creditor foreclosed on the land. Netelli must recognize a $53,500 gain on the disposition of the land.

Question

Quizplus · Accepted Answer

When a nonrecourse mortgage is foreclosed, the difference between the outstanding debt and the adjusted basis of the property is treated as a gain. In this case, the outstanding debt is $228,500 and the adjusted basis is $175,000, resulting in a gain of $53,500. As a result, Netelli must recognize this gain on the disposition of the land.