8116 / Is it possible for a portion of discharged debt to be treated as “income from discharge of indebtedness” and a portion treated as some other type of taxable income?

Example: Asher borrows $10,000 from Ashley to take a two-week European vacation. When the loan becomes due, in lieu of repayment, Ashley accepts a painting from Asher worth $8,000 that he purchased three years ago for $2,000 and forgives the balance of the loan ($2,000). In this case, it is as if Asher sold the painting to Ashley for $8,000, which Asher in turn uses to partially repay the debt. For tax purposes, Asher must include $6,000 of capital gain income ($8,000 minus $2,000 (basis in painting)) under IRC Section 61(a)(3). As to the remaining $2,000, since Ashley forgave this amount for no consideration, Asher must include it in gross income under IRC Section 61(a)(12). Bottom line: Of the $8,000 of total income, $6,000 is capital gain and $2,000 is discharge of debt income.