Sally and Ed Each Own Property with a Fair Market

question 102

Essay

Sally and Ed each own property with a fair market value less than the amount of the outstanding mortgage on the property and also less than the original cost basis.They each were able to convince the mortgage holder to reduce the principal amount on the mortgage.Sally's mortgage is on her personal residence and Ed's mortgage is on rental property he owns.
a.Explain whether each of these individuals has realized income from the reduction in the debt.
b.Assume that under the current system of measuring income,each of these taxpayers realized income from the reductions in the mortgages.Should either of these taxpayers be permitted to exclude any of the debt reduction income?

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Definitions:

Market Value

The total value of a company, measured through the market price of its outstanding shares.

Equity

The value of an asset after deducting the amount of liabilities or the ownership interest in a firm.

Call Contract

A financial contract that gives the holder the right, but not the obligation, to buy a stock, bond, commodity, or other asset at a specified price within a specific time period.

Option Contract

An agreement that gives the owner the right, but not the obligation, to buy or sell a specific asset at a specific price for a set period of time.