Basis when loans are discounted?

[Account Closed]

I bought a property six months ago for $250.00 subject to mortgages totaling $275K (2 liens, one lender. I was able to negotiate with the lender and paid off the liens in full for $85K. This wasn't a short sale as I negotiated with the lender as the owner. What is my basis for tax purposes? Is it purchase price plus existing debt?

I won't be receiving a debt forgiveness 1099 as I wasn't the borrower. The borrower's debts against the house were eliminated in BK.

I'm closing on the re-sale of the property next week. My project spread sheet shows the profit as the difference between my all-in costs plus the rehab costs subtracted from the sale price of $160K. For tax purposes, f my basis is $275K and my sale is $160K, that's a loss. Which there wasn't. How does the IRS treat the discounted lien?