Lee owns land and a building (held for investment) with an adjusted basis of $75,000 and a fair market value of $250,000. The property is subject to a mortgage of $400,000. Because Lee is in arrears on the mortgage payments, the creditor is willing to accept the property in return for canceling the amount of the mortgage.

a. How can the adjusted basis of the property be less than the amount of the mortgage?

b. If the creditor’s offer is accepted, what are the effects on the amount realized, the adjusted basis, and the realized gain or loss for Lee?