I hadn't thought of it in terms of a foreclosure, whre the bank loses money in the subsequent sale. Still it's the same concept as a short sale or a settlement of any debt for less than owed.
The difference between the amount of debt and what is paid or otherwise recovered is seen as what's called imputed income to the person "getting off the hook." A couple of folks touched on the concept of how the taxes work. Bank loses $40K in the transaction you described. They deduct it. The guy who lost his farm gets taxed on it as income.
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Today's Featured Article - Massey Ferguson 35 (and up) Tractor Assembly Notes - by Jack Wetmore. These assembly notes are for Massey Ferguson tractors with a two stage clutch and 6 speed, 8 speed and mutli-power transmissions. I see a lot of discussion forum messages regarding damaged clutches from improper assembly. The objective is to have the engine and transmission slide together safely and easily until the gap between the two halves is less than 1/4", BEFORE tightening any of the bolts holding the two together. Using bolts to draw the two halves together will damage the PTO
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