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Tax Concerns When Modifying or Purchasing Distressed Real Estate Debt: Borrower and Lender Concerns

Related Party Purchases. Significant Modifications, Market Discount and Loan-to-Own Transactions

Note: CPE credit is not offered on this program

Recording of a 90-minute premium CLE video webinar with Q&A

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Conducted on Tuesday, September 21, 2021

Recorded event now available

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This CLE course will analyze key tax issues that should be considered in real estate loan modifications and debt purchase transactions. The panel will discuss the cancellation of indebtedness (COD) income concerns with related party purchases and significant modifications, market discount rules, and phantom tax liability associated with loan-to-own transactions.

Description

The purchase and/or modification of distressed real estate loans can have unintended tax consequences for borrowers and lenders. Counsel should have a thorough understanding of the federal tax rules and regulations that may apply in various workout and investment scenarios.

A borrower may be required to recognize COD income where it pays off its real estate debt at a discount, or where it (or a related party) purchases its real estate debt at a discount. A borrower might also recognize income when there has been a "significant modification" of a debt instrument. IRS regulations outline what constitutes a significant modification and how such income should be calculated.

A third-party investor who purchases a loan at a discount may be subject to market discount rules. Under a formula determined under the tax regulations, the discount would accrue over the remaining term of the loan, and the investor may be hit with ordinary income when the loan is repaid.

Listen as our authoritative panel discusses these and other tax issues borrowers and lenders should consider when purchasing real estate debt entering into loan modifications.

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Outline

  1. Loan modifications and the tax code
    1. Events triggering COD income
    2. Defining "significant modification"
    3. Tax liability in connection with constructive exchange of debt
  2. Issues to consider in purchasing distressed debt
    1. Related party purchases
    2. Market discount rules
    3. Purchase and subsequent foreclosure or deed in lieu: phantom tax liability
  3. Planning tips

Benefits

The panel will review these and other important questions:

  • When does a loan payoff, foreclosure, or a deed in lieu of foreclosure trigger COD or other income for the borrower?
  • What kinds of loan amendments might be deemed significant modifications resulting in a constructive exchange of old debt for new?
  • What does the IRC say about the tax liability for a lender who purchases a loan at a discount?

Faculty

Buchman, Jay
Jay L. Buchman
Attorney
K&L Gates

Mr. Buchman advises clients on the tax aspects of a broad range of domestic and international transactions. In...  |  Read More

Mandarino, Joseph
Joseph C. Mandarino
Partner
Smith Gambrell & Russell

Mr. Mandarino's practice focuses on corporate, tax and finance law. He is involved with a wide variety of...  |  Read More

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