Question

Laurie owns land that serves as security for a $60,000 mortgage. Her basis in the land is $20,000 and the fair market value is $50,000. Laurie is not personally liable for the loan. The bank forecloses on the property. What is the tax consequence to Laurie?

A. Laurie recognize income in the amount of his discharge of indebtedness; $60,000.
B. Laurie has a gain on the transfer and must recognize income of $40,000.
C. Laurie has $40,000 of income; a gain of $30,000 on the transfer and discharge of indebtedness of $10,000.
D. Both (a) and (b).
E. None of the above.

Answer 1

D. Both a and b.

Step-by-step explanation:

Laurie has land of $60,000 as mortgage. Her basis in the land is $20,000 which means she can recognize the income of $40,000 as a gain on transfer. The fair market value of land is $50,000, the amount of discharge of indebtness is $60,000 which is the amount of mortgage.