Reverse Mortgages when they come due?
I am working on a tax case and I’m having trouble understanding some language.
Here is a quick background. Kelly inherited a house from her uncle Paul (passed away). Paul had a reverse mortgage on the house. The balance of the mortgage at the time of Paul’s death was $ 210,000 and the FMV of the house was $ 90,000.
Kelly can offer to settle the loan with the bank at the house’s FMV, $ 90,000, and then stay in the house. She is thinking of offering them cash in that amount in order to get the loan discharged. She is concerned about the amount of gains arising from this option.
My question is when it says Kelly can settle the loan with the bank at the house’s FMV, $ 90,000. Does that mean Kelly will only be required to pay the bank $ 90,000 instead of $ 210,000, so the claim is gone? I don’t get why the loan would need to be discharged if it says she’s going to pay $ 90,000 in cash.
Or does the first statement mean that Kelly basis in the house will be at its FMV of $ 90,000 and she will have a loan of $ 120,000 (210,000 – 90,000)? But if she pays in cash the $ 120,000 will be discharged?
Any help is appreciated