Joan purchased her residence in 2012 for $500,000 by borrowing $450,000. In 2018, 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. Joan is insolvent before and after the loan reduction. How much income would Joan have to recognize if the bank agrees to reduce the mortgage on the residence to $300,000?

Question

Quizplus · Accepted Answer

Joan would not have to recognize any income from the mortgage reduction because she is insolvent both before and after the loan reduction. Under the tax code, if a debtor is insolvent, the amount of debt forgiven up to the amount by which they are insolvent is not considered taxable income.

Joan Purchased Her Residence in 2012 for $500,000 by Borrowing