Investment income or cancellation of debt income?

[Vityaba]

A TP purchased a home as an investment with an intention to remodel and sell. It was a cash purchase (overall basis as of today is $90k). He held the property for a year and took a loan ($100k), from a private person, that he intended to use for the remodeling. In a few months the TP decides he does not want to do the remodeling and made a deal with the person who loaned him money to transfer that property into that person's name to cancel out the loan

 

I see two options here:

1. classify as an investment with cost $90k and selling price $100k; fyi, the TP is not in a business of flipping; it was a one time deal for him

2. a capital loss of $90k and a cancellation of $100k debt;

 

The TP wants to go with option 1. I am afraid that the IRS may clasiffy it as the second option and it will result in $3k allowed capital loss per year and $100k income in year one. 

 

Your opinion? It would be nice to have a reference to some kind of regulation to present this to my client. 

 

Thank you for your input

[Pacun]

I would go with option 1 since option 2 leaves an aroma.

[kcjenkins]

Option 1 seems to describe the transaction quite reasonably.  The lender did not cancel the debt,  He accepted payment.