LO.4 Harry was experiencing financial difficulties and could not make the mortgage payments on his property. The mortgage holder agreed to reduce the debt principal by

$50,000 because the real estate market was depressed. Assuming that Harry is not bankrupt or insolvent, would the tax consequences differ under the following circumstances?

Explain.

• The mortgage is held by the person who sold him the property.

• The mortgage is on farmland that was held by a bank that loaned the money so that Harry could purchase the land.

• The mortgage is on his personal residence and is held by the financial institution that made the loan for the purchase of his residence.

• Harry’s debt was reduced because the mortgage holder, a bank, held a drawing that Harry won; the prize was a $50,000 reduction in his mortgage.