How do I answer this?

Question

Several years ago, Ned Stark borrowed $250,000 from the Bank of the Seven Kingdoms and used it to buy an apartment building. Mr. Stark, very busy visiting Winterfell, has not been able to rent any of the apartments in the building and has not made any principal payments on the loan, but he has paid all of the interest due. Mr. Stark has fallen on hard times and his only asset is the apartment building, which is now worth $187,500 and which now has an adjusted basis of $125,000. If the bank cancels the debt in exchange for the apartment building, what are the income tax consequences to Mr. Stark?

Answer 1

Income tax consequences of Mr. Stark is on the capital gain of $62,500 realized from the apartment building.

Mr.Stark have to disclose the capital gain in the income tax returns in order to facilitate the tax processes.

Explanation:

Amount borrowed $250,000

The amount was to be used in buying apartment building

The apartment building value has dropped to $187,500

The adjusted basis of the building $125,000

If the debt is cancelled, there would be no other financial obligations on the apartment building and the tax consequences to Mr.Stark is based on capital gain realized from the adjusted basis and current value of the property (apartment building).

Capital Gain=Current worth/value of the apartment building-basis of the building

=$187,500-125,000

=$62,500

The tax consequences would thus be on the $62,500 which has to be disclosed and taxed based on the different income tax brackets (or the rates for taxing the capital gain).