House Bill Would Take the Tax Heat Off CRE Debt Workouts

Many CRE property owners facing problems with their loans might look for a workout with a lender. Regulators have been promoting the move, as the Office of the Comptroller of the Currency; the Treasury; Federal Deposit Insurance Corporation; and National Credit Union Administration in July published the final revised version of a 2009 policy addressing commercial real estate loan accommodations and workouts.

It wasn’t everything and anything goes, but it offered heavy encouragement for banks, at least, to work out a loan before it would go bad. Lenders have their own separate reasons for doing workouts when possible, as it can avoid the need to take back property and to take a hit on a balance sheet.

But where there’s a workout, there’s a way to go in paying taxes. The IRS explains in Publication 4681 that “debt that is canceled, forgiven, or discharged for less than the full amount of the debt as ‘canceled debt’” and typically “treated for income tax purposes as having income.” The Tax People will have their due.

Though maybe not if a bipartisan bill introduced last week into the House, called Saving Our Mainstreet American Locations for Leisure and Shopping Act of 2023, ultimately gets passed. Introduced by representatives Claudia Tenney (R-NY), Brian Higgins (D-NY), Mike Lawler (R-NY), and Pat Ryan (D-NY), the act would allow for discharge of indebtedness if the case of qualified commercial or retail assets, including real estate. The qualifications would include the assumption of the indebtedness before March 1, 2022, and discharged between December 31, 2022, and January 1, 2027. The debt would have to be “secured directly or indirectly by specified real property of the taxpayer at all times after such indebtedness was so incurred or assumed and before such discharge.” Additionally, the “specified real property” has to be real property “used in the trade or business of the taxpayer” and not described under some other sections of tax law.

“In the case of commercial real estate, the full economic consequences of the pandemic are still unfolding,” said Real Estate Roundtable President and CEO Jeffrey DeBoer in prepared remarks. “Remote work and other challenges facing cities have put stress on certain real estate assets, such as office buildings. Debt workouts between lenders and borrowers are a critical part of the solution. Workouts can ensure that these properties continue supporting jobs and economic activity.”

But there is typically a long distance between a bill and a law, especially when there is heavy disagreement over usual major spending bills and the bipartisan supporters are all from a single state with heavy interest in the industry in question.