Reduction in Nonrecourse Debt Was Part of Sales Price in Short Sale, Could Not Be Excluded from Income Under IRC §108
A taxpayer with property secured by a nonrecourse loan, who returns said property to the lender via foreclosure, deems the entire loan balance as the sales price for income tax purposes. This holds true even if the property’s fair market value is below the loan balance. But what happens when the lender consents to a payment less than the loan’s face value, facilitating a short sale by aligning with the buyer’s offer? Does this debt reduction equate to canceled debt income, or does it remain part of the sales price? Why does the distinction matter?
In the case of Parker v. Commissioner,[1] the Tax Court examined such a scenario. Their conclusion: the debt reduction should be recognized by the taxpayer as part of the sales price, not as canceled debt income.
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