Mortgage Relief

Acquired freedom from mortgage debt, generally through Assumption of Mortgage by another party or debt retirement. In a Tax-Free Exchange, mortgage relief is considered Boot received, causing a taxable gain to the extent of the lesser of the realized gain or the fair market value of the boot. Mortgage relief in excess of the Tax Basis of property will result in taxable gain in the case of abandonment, which can be reduced if there are continuing obligations on the debt.

Acquired freedom from mortgage debt, generally through Assumption of Mortgage by another party or Debt retirement. In a tax-free exchange, mortgage relief is considered Boot received. In many foreclosures, where the property is the sole collateral for the loan, or the borrower fails to pay anything in addition to the real estate, the transaction is treated for tax purposes as a sale for the mortgage debt. If the taxpayer's basis is less than the mortgage relief, the difference is a taxable gain.
Example: Hank owns a building with a Fair Market Value of $100,000 and an Adjusted Tax Basis of $50,000. It is encumbered by a $40,000 Mortgage. Hank exchanges the building for land with a fair market value of $60,000, and the other party assumes Hank's $40,000 mortgage. The total value Hank receives is $100,000. Hank's Realized Gain is $50,000, but for tax purposes he need Recognize only $40,000 for the amount of mortgage relief.
Example: Eric owed $650,000 on a home upon Foreclosure. Because his tax basis of the home was $400,000, a $250,000 Gain is realized, but may be excluded from taxation if the home was his principal residence.