IRS Dilemma

If you are not personally liable for the debt,
you do not have ordinary income from the cancellation of debt unless you retain the collateral
and either:
The lender offers a discount for the early
payment of the debt or
The lender agrees to a loan modification
that results in the reduction of the principal
balance of the debt.
See Discounts and loan modifications, later.
Also, upon the disposition of the property securing a nonrecourse debt, the amount realized includes the entire unpaid amount of the debt, not
just the FMV of the property. As a result, you
may realize a gain or loss if the outstanding
debt immediately before the disposition is more
or less than your adjusted basis in the property.
For more details on figuring your gain or loss,
see chapter 2 of this publication or see Publication 544.

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