Simon, a calendar-year, cash-basis taxpayer, owns a building in which he operates a carpet installation business. At the end of Year 3, his building has a $200,000 basis and a $100,000 fair market value. The building is secured by a $125,000 mortgage, which was incurred in Year 1. However, the seller agreed to reduce the mortgage to $110,000 as a result of Simon's inability to make full payments. Which of the following statements iscorrectregarding the mortgage adjustment?

ASimon's only option is to reduce the basis of his building by $15,000 for Year 4.

BSimon's only option is to reduce the basis of his building by $15,000 for Year 3.

CThe $15,000 reduction on the mortgage is not includible in gross income for Year 3

3

.DSimon must either reduce the basis of his building in Year 4 or report gross income of $15,000 in Year 3.