Edward and Inez purchased their home in 2006 for $600,000.They financed the purchase with a $550,000 mortgage.In 2016,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 2006 for $600,000.They financed the purchase with a $550,000 mortgage.In 2016,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

The mortgage debt is forgiven, which is income. The sale price is less than the purchase price, which is a loss.

Edward and Inez Purchased Their Home in 2006 for $600,000