Bob and Linda purchased their vacation home in 2013 for $400,000.They financed the purchase with a $350,000 mortgage.In 2016,they fall upon hard times and cannot make the mortgage payments,and their mortgage is foreclosed.The mortgage company sells the house for $300,000.At the time of the sale,the mortgage balance is $325,000.The mortgage company cancels the remaining debt on the mortgage.How much income do Bob and Linda have from the cancellation of the remaining debt on their home?

Question

Quizplus · Accepted Answer

The income from cancellation of debt is generally taxable. However, in this case, since the foreclosure sale proceeds were not sufficient to pay off the entire mortgage balance, the mortgage company canceled the remaining debt ($325,000 - $300,000 = $25,000). This canceled debt is treated as income to the borrowers. Thus, Bob and Linda have $25,000 of income from the cancellation of debt, and the answer is B.

Bob and Linda Purchased Their Vacation Home in 2013 for $400,000.They