For example, assume a taxpayer owes $100,000 on a rental property which has been foreclosed and the debt is forgiven.  Normally the $100,000 debt forgiven is taxable income to him.  Further assume the taxpayer is insolvent and owns a second rental property with a basis of $250,000.  The taxpayer can elect to reduce the basis of the second property to $150,000 instead of paying tax on the $100,000 of debt forgiven.  

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