Recently, I read an article relating to national commercial real estate conditions and the 2009
Stimulus Act. Many real estate owners and developers are negotiating with their lenders to modify
existing debt and the Recovery and Reinvestment Act of 2009 provides some beneficial tax relief.
With tight finance, increased vacancies, downward pressure on rents, owners are looking for relief.
The move to negotiate with lenders for debt relief, including forgiveness, has become a popular
means of capital preservation. However, debt restructuring can result in cancellation of debt
(COD) income for tax purposes, especially when the loan is reduced or the owner pays off the
loan at a discount. Most often, the cancellation is taxed as income at the borrower’s ordinary rate.
Let’s say an owner owes $500,000 on a mortgage and the lender agrees to reduce the principal to
$350,000. Unless there is an exception that applies, the owner will recognize $150,000 of ordinary
income.
The Stimulus Act gives owners an alternative. The new provision allows them to defer COD
resulting from 2009 and 2010 transactions until 2014. The owner must recognize 20% of the COD
in 2014, and in each of the next four years. The new alternative is simpler and has fewer
restrictions.
Applying this new rule to our example, if the principal of a $500,000 mortgage were reduced to
$350,000, instead of immediately paying tax on $150,000 of income, the owner can now defer the
income until 2014 and recognize $30,000 in each year from 2014 until 2018.
Secured and unsecured debts are eligible. Property value isn't considered. The basis of an owner's
property isn't reduced, and he continues to depreciate 100% of his original cost. The property
must be used in the owner's “trade or business”.
Many commercial property owners are now asking their lenders for debt relief. The 2009 Stimulus
Act alternative will allow them to restructure debt on their troubled assets without the punitive
tax consequence as before.
Information gathered from sources deemed reliable, but not guaranteed. It is recommended that
individuals check with all appropriate professionals for legal, accounting, and development advice
Curt Johnson, SIOR