Edward and Inez purchased their home in 2007 for $600,000.They financed the purchase with a $550,000 mortgage.In 2017,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.

Question

Edward and Inez purchased their home in 2007 for $600,000.They financed the purchase with a $550,000 mortgage.In 2017,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?
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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.
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Quizplus · Accepted Answer

Edward and Inez will realize a loss on the sale of their home because they sold it for less than they paid for it. They will also recognize no income on the cancellation of the mortgage loan because the mortgage company canceled the remaining debt.

Edward and Inez Purchased Their Home in 2007 for $600,000