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

Blitza is not personally liable for the nonrecourse mortgage, so it has no legal obligation to settle the unpaid balance of the mortgage. Therefore, statement a. is true.

Blitza's loss on the foreclosure is the difference between its adjusted basis in the property ($300,000) and the property's FMV at the time of foreclosure ($260,000), or $40,000. Since the property was held for use in Blitza's trade or business, this loss is treated as a Section 1231 loss, making statement c. true. Therefore, both statements a. and c. are true, making choice D the correct answer.