Blitza Inc. owned real property used for 12 years in its business that was subject to a $294,500 nonrecourse mortgage. Blitza failed to make timely mortgage payments, so the creditor foreclosed. At date of foreclosure, Blitza's basis in the property was $300,000, and the property's appraised FMV was $260,000. Which of the following statements is true?

Question

Quizplus · Accepted Answer

Since the mortgage was nonrecourse, Blitza has no legal obligation to settle the unpaid balance of the mortgage. The foreclosure results in a deemed sale of the property for its FMV of $260,000, resulting in a Section 1231 loss of $40,000 ($300,000 basis - $260,000 FMV). However, since the nonrecourse mortgage was in excess of Blitza's basis in the property, the unpaid balance of $34,500 is treated as a gain on the foreclosure. Therefore, the net Section 1231 loss recognized is $5,500 ($40,000 loss - $34,500 gain).