Question

Charlie's vacation cabin was secured by a nonrecourse mortgage. This year, the bank foreclosed on the property. At the timeof the foreclosure: the principal balance of the loan was $200,000; the cabin's fair market value was $150,000; and Charlie'sadjusted basis was $220,000. Charlie received no money or other property as part of the transaction. Which of the followingcorrectly describes the income, gain, or loss that Charlie realized as a result of this foreclosure?

Answer 1

Charlie realized a loss of $70,000 as a result of the foreclosure.

Step-by-step explanation:

Charlie realized a loss as a result of the foreclosure. To calculate the loss, we compare the fair market value of the cabin ($150,000) to Charlie's adjusted basis ($220,000). Since the fair market value is lower than the adjusted basis, Charlie has a loss. The loss is the difference between the two values - $220,000 - $150,000 = -$70,000.

Since Charlie received no money or other property as part of the transaction, this loss is the amount that Charlie realized as a result of the foreclosure.