Cancellation of debt can mean big tax bill
By Jenna V. Loceff, Business Journal Staff Reporter
While homeowners have been protected from impact, commercial owners must plan
Craig Schmitt
NORTH BAY – Commercial property owners are having to come up with ways to avoid paying high taxes on loan restructuring and sales back to a bank.
According to the Federal Reserve, the United States commercial property market is $6.5 trillion with loans outstanding at an estimated $3.3 trillion.
“There is going to be a lot more pressure on commercial property owners,” said Craig Schmitt of accounting firm Burr Pilger Mayer.
Chris Paris, also with BPM, said that recent legislation has only been focused on helping homeowners, not commercial property.
The Mortgage Forgiveness Debt Relief Act, signed on Dec. 20, 2007, by President Bush, gave homeowners conducting short sales an exemption from paying tax on the forgiven debt if they met certain criteria. There has been nothing like this on the commercial side.
With the uptick in loan modifications and interest rate changes, in addition to the financial and legal issues owners face, they could be faced with large tax bills.
For instance, cancellation of debt produces income equal to the amount of the loan forgiven.
When looking to work out commercial real estate issues, there are three potential sources to look for, said Mr. Schmitt.
“If you have a cancellation of debt income, can you use it? Can you defer it? Can you firewall it?”
If the first two options are not available, firewalling can be a viable option. If the business owner looks at the issue early enough, the solution could be as simple as forming an LLC or a corporation, said Mr. Paris.
“You do have options,” he said. “Your planning opportunities are there. Do not wait until after the fact.”
Said Mr. Schmitt: “Have you focused on the issues that could occur with a potential transfer of property back to the lender? Is it recourse or nonrecourse debt? It is very complex. There are tax issues and legal issues, you don’t want to rush,” he said.
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Interesting!
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by Mortgage Refinancing