Question

Change the facts in the preceeding problem by assuming that the $120,000 mortgage on Lyle's real estate is nonrecourse. Determine the tax consequence to Lyle if the mortgage holder forecloses on the real estate.

Answer 1

Calculating the bad debt loss as follows:

Mortgage - fair market value of

property= $120,000- $100,000

$20,000

Calculating the capital profit as follows:

Fair market value of property - Adjusted basis= $100,000- $75,000=

$25,000