I hadn't thought of it in terms of a foreclosure, whre the bank loses money in the subsequent sale. Still it's the same concept as a short sale or a settlement of any debt for less than owed.
The difference between the amount of debt and what is paid or otherwise recovered is seen as what's called imputed income to the person "getting off the hook." A couple of folks touched on the concept of how the taxes work. Bank loses $40K in the transaction you described. They deduct it. The guy who lost his farm gets taxed on it as income.
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Today's Featured Article - Restoration Story: 1951 Farmall H - by The Red (John Fritz). I have been a collector of Farmall tractors since 1990 when I first obtained part of the family farm in Eastern Indiana. My current collection includes a 1938 F20, 1945 H, 1946 H, and the recently purchased 1951 H. This article will focus on what I encountered and what I did to bring the 1951 NEAR DEATH Farmall H back to life.
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