New Tax Incentives for Discharge of Real Property Indebtedness Under Economic Stimulus Bill

A new tax election contained in the recently enacted American Recovery and Reinvestment Act of 2009 (the stimulus bill) can benefit certain owners of commercial real estate who repurchase, exchange, or modify their existing real property indebtedness during 2009 and 2010. If a "workout" with a lender results in cancellation-of-debt (COD) income, the owner will now have the choice to either (1) defer such income until 2014 or (2) apply the provisions of the preamendment law to the income.

Apart from this change, the law permits property owners to exclude COD income resulting from workouts under certain circumstances. The price for this exclusion is the reduction of tax attributes that would normally provide a benefit in future years. For example, if an insolvent company discharged $5 million of debt in 2008 for a discounted price of $4 million, that company would be able to exclude the $1 million in COD income for that tax year but would also have to reduce its tax attributes (e.g., reduce its net operating loss carryforward or basis in the property).

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