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cancellation of debt income under the qualified principal residence exclusion
from the same primary residence, but not both.
(4) Example 14. Joanne purchased her principal residence property for $100,000
paying $20,000 cash and securing a mortgage loan (recourse debt) of $80,000.
When the mortgage balance was $72,000, Joanne defaulted and the property
was sold at foreclosure for $68,000.
(5) If the liability was discharged before 2007, then Joanne had cancellation of
indebtedness income of $4,000 ($72,000 mortgage balance minus $68,000
FMV of the property) and a nondeductible capital loss of $32,000 ($68,000 FMV
of the property minus $100,000 adjusted basis of the property). If the liability is
discharged after 2006, but before January 1, 2026, Joanne can exclude the
cancellation of indebtedness income of $4,000 per IRC § 108(a)(1)(E) and she
has a nondeductible capital loss of $32,000 ($68,000 FMV of the property
minus $100,000 adjusted basis of the property).
(6) Example 15. Because of non-payment of a recourse mortgage, the lender
foreclosed on Jack’s principal residence and he later received government
relocation assistance of $1,500. At the time of the foreclosure sale, Jack’s basis
in the home was $245,000, the home's FMV was $255,000, and the outstanding
amount of mortgage debt (first and second) on the home was $220,000.
(7) Cancellation of debt income is zero ($220,000 debt balance immediately before
the foreclosure minus $255,000 the FMV of the property). Peter’s realized loss
from the foreclosure was $23,500 ($220,000 outstanding debt balance plus
$1,500 relocation assistance minus $245,000 adjusted basis of the property).
(8) The rationale of limiting the amount realized to the debt balance is because
Jack did not receive any proceeds from the foreclosure sale. The property was
Jack’s principal residence. Thus, the disposition would be reported on Form
8949, Sales and Other Dispositions of Capital Assets and Schedule D, Capital
(9) Example 16. Dan acquired his primary residence for $300,000 in year 1. He
refinanced the loan in year 5 for $320,000 and used $20,000 to pay off personal
credit cards and car loans. In year 7, when the mortgage principal balance was
$290,000, he was unable to make the monthly payments and he did not qualify
for any mortgage restructuring programs. The lender ultimately foreclosed on
the property in year 9 and issued a Form 1099-A indicating a market value of
$350,000. The foreclosure sale did not occur until year 10 for $155,000. The
taxpayer did not report the disposition on any of his tax returns. The taxpayer’s
tax return for year 9 was selected for examination.
(10) If the loan was nonrecourse, the disposition should have been reported in year
9, the year that the lender foreclosed on the property. The foreclosure ended