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Proposed legislation for CRE debt workout tax relief

In Michigan and other states, commercial real estate owners may benefit from new legislation that makes it easier to discharge qualified real estate debt from loan modifications or debt workouts. The House of Representatives has introduced the bill H.R. 5580 to help counteract the effects of the pandemic that continue to plague commercial real estate (CRE), especially office buildings.

Purpose of the legislation

The pandemic caused a dramatic increase in remote work, affecting CRE owners and making it harder for them to service their debt. The ability of commercial owners to negotiate debt workouts with lenders is a critical part of efforts to ensure these properties continue to support companies, jobs and economic activity.

Summary of the proposed bill

The H.R. 5580 bill has been proposed but not yet enacted. This bipartisan legislation aims to help distressed business & corporate CRE owners find relief from heavy debt burdens. To qualify for the proposed tax relief, the entity must have incurred or assumed the commercial or retail debt before March 1, 2022. The tax relief would cover all qualified debts discharged from December 31, 2022, through January 1, 2027.

How the tax relief works

When a business has CRE debt forgiven by a lender, the IRS (Internal Revenue Service) typically considers the forgiven debt as income. Consequently, while the business no longer has to repay the debt, it does have to pay taxes on the discharged debt as if it were income.

If a business has discharged debt that meets the definition of qualified real property business indebtedness (QRPBI) and the debt was released within the timeframe specified under the proposed legislation, the business will not have to pay taxes on that amount. The business will need to account for the forgiven debt as a change in basis for the property but will not need to add the forgiven debt to its gross income, as it would for other types of forgiven debt. The IRS details this exclusion of discharged QRBPI from gross income in Internal Revenue Code (IRC) Section 108.

Remote work and other pandemic effects have stressed office buildings and other commercial real estate. Finding constructive ways to work out discharged debt is essential to the solution.