Jolie purchased her residence in 2010 for $500,000 by borrowing $450,000.In 2016,she becomes unemployed and can no longer afford to make the full monthly payment on the mortgage.When the mortgage balance is $430,000,the bank agrees to reduce her mortgage to avoid foreclosure.What is Jolie's basis in her residence if the bank agrees to reduce the mortgage on the residence to $300,000?

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Quizplus · Accepted Answer

Jolie's basis in her residence is the original purchase price of $500,000 minus the amount she borrowed, which is $450,000. Therefore, her basis is $50,000. When the bank reduces her mortgage to $300,000, she is deemed to receive $130,000 of mortgage debt forgiveness, which is the difference between the original mortgage balance of $430,000 and the new mortgage balance of $300,000. This is not taxable, as it is considered a qualified principal residence indebtedness. Therefore, Jolie's basis in the residence is still $50,000, and she does not incur any gain or loss in the transaction.

Jolie Purchased Her Residence in 2010 for $500,000 by Borrowing