Postpetition Deed in lieu - tax consequence?
Posted: Sun Nov 06, 2011 10:05 am
Hawaii is a recourse state.
Sent from my iPhone
On Nov 4, 2011, at 7:23 PM, "Curt Harrington" wrote:
> First I am assuming that the condo loan is recourse. If it is non-recourse, further tax consequences are not immediately obvious to me at this time.
>
> If the loan is recourse, then Yes, there are tax consequences.
>
> Stating it simply: non-judicial foreclosure will cut off the deficiency before it has a chance to be relieved in bankruptcy. Thus, the debt relief will not occur pursuant to title 11 and the reduction of tax attributes will not enable the government to "recapture" the debt cancellation in future years via reduced basis.
>
> A "deed in lieu" would leave the cancellation of a recourse loan & its cancellation of indebtedness under title 11 and force a reduction in attributes under IRC 108(b) relating to IRC 108(a)(1)(A)
>
> Generally:
>
> Even under bankruptcy, IRC section 108 requires the reduction of tax attributes. These include:
>
> IRC 108(b)(2)(A) reduction of NOL's
> IRC 108(b)(2)(B)-(G) reduction of general business credit, minimum tax credit, capital loss carryovers, basis redution (in other property), passive activity loss and credit carryovers and foreign tax credit carryovers.
>
> Non-judicial foreclosure operates under California Law to "turn a recourse debt into a non-recourse debt, for tax purposes only. There has been a lot of controversy on this matter as evidenced by articles in Volume 20, No.s 1 & 2 of the California Tax lawyer in 2011, as well as an article by Boutris and Epstein "Tax Consequences of Non-Judicial Foreclosure" which appeared in the Contra Costa Lawyer magazine Sept 28, 2010 and in the California Bar's Tax Section, Litigation subsection newsletter attached below.
>
> The "conversion to non-recourse" as it is popularly known, occurs through California Code of Civil Procedure section 580(d)
>
> 580d. No judgment shall be rendered for any deficiency upon a note
> secured by a deed of trust or mortgage upon real property or an
> estate for years therein hereafter executed in any case in which the
> real property or estate for years therein has been sold by the
> mortgagee or trustee under power of sale contained in the mortgage or
> deed of trust.
> This section does not apply to any deed of trust, mortgage or
> other lien given to secure the payment of bonds or other evidences of
> indebtedness authorized or permitted to be issued by the
> Commissioner of Corporations, or which is made by a public utility
> subject to the Public Utilities Act (Part 1 (commencing with Section
> 201) of Division 1 of the Public Utilities Code).
>
> However California Code of Civil Procedure section 580.5. (b) With respect to an obligation which is secured by a mortgage
> or a deed of trust upon real property or an estate for years therein
> and which is also supported by a letter of credit, neither the
> presentment, receipt of payment, or enforcement of a draft or demand
> for payment under the letter of credit by the beneficiary of the
> letter of credit nor the honor or payment of, or the demand for
> reimbursement, receipt of reimbursement or enforcement of any
> contractual, statutory or other reimbursement obligation relating to,
> the letter of credit by the issuer of the letter of credit shall,
> whether done before or after the judicial or nonjudicial foreclosure
> of the mortgage or deed of trust or conveyance in lieu thereof,
> constitute any of the following:
> (1) An action within the meaning of subdivision (a) of Section
> 726.
>
> Thus there is no single action (or action at all) and no cutting off of the debt by "conversion to non-recourse" under 580(d).
>
> Thus it is my understanding that even if in bankruptcy, a deed in lieu of a debt that was a recourse debt will require the filing under IRC section 108 of a statement of reduction of attributes which will cost them in future.
>
> Therefore it would seem that as I read all these articles and reasonings, that because non-judicial forclosure extinguishes the state source of the obligation (making the debt non-recourse from a tax standpoint only) that it eliminates the need for sec 108 attribute reduction.
>
> I also direct you to IRS Pub 4681 where abandonment (foreclosure) is distinguished from deed-in-Lieu.
>
> Hope this helps.
>
> Curt Harrington
> http://patentax.com
> (I will try to attach the Lit Section email if I can)
>
> --- In cdcbaa@yahoogroups.com, Holly Roark wrote:
> >
> > Client is surrendering a deeded time share. Lender has provided deed
> > in lieu documents. Discharge has not yet been entered but we expect
> > the debtors will receive a discharge. Is there a tax consequence to
> > the debtors signing the postpetition deed in lieu?
> >
> > --
> > Sent from my mobile device
> >
> > Holly Roark
> > holly@...
> > www.roarklawoffices.com
> > Central District of California
> > Consumer Bankruptcy Attorney
> > 1875 Century Park East, Suite 600
> > Los Angeles, CA 90067
> > T (310) 553-2600
> > F (310) 553-2601
> >
>
>
Hawaii is a recourse state.Sent from my iPhoneOn Nov 4, 2011, at 7:23 PM, "Curt Harrington" <boomersooner@mail.ru> wrote:
First I am assuming that the condo loan is recourse. If it is non-recourse, further tax consequences are not immediately obvious to me at this time.
If the loan is recourse, then Yes, there are tax consequences.
Stating it simply: non-judicial foreclosure will cut off the deficiency before it has a chance to be relieved in bankruptcy. Thus, the debt relief will not occur pursuant to title 11 and the reduction of tax attributes will not enable the government to "recapture" the debt cancellation in future years via reduced basis.
A "deed in lieu" would leave the cancellation of a recourse loan & its cancellation of indebtedness under title 11 and force a reduction in attributes under IRC 108(b) relating to IRC 108(a)(1)(A)
Generally:
Even under bankruptcy, IRC section 108 requires the reduction of tax attributes. These include:
IRC 108(b)(2)(A) reduction of NOL's
IRC 108(b)(2)(B)-(G) reduction of general business credit, minimum tax credit, capital loss carryovers, basis redution (in other property), passive activity loss and credit carryovers and foreign tax credit carryovers.
Non-judicial foreclosure operates under California Law to "turn a recourse debt into a non-recourse debt, for tax purposes only. There has been a lot of controversy on this matter as evidenced by articles in Volume 20, No.s 1 & 2 of the California Tax lawyer in 2011, as well as an article by Boutris and Epstein "Tax Consequences of Non-Judicial Foreclosure" which appeared in the Contra Costa Lawyer magazine Sept 28, 2010 and in the California Bar's Tax Section, Litigation subsection newsletter attached below.
The "conversion to non-recourse" as it is popularly known, occurs through California Code of Civil Procedure section 580(d)
580d. No judgment shall be rendered for any deficiency upon a note
secured by a deed of trust or mortgage upon real property or an
estate for years therein hereafter executed in any case in which the
real property or estate for years therein has been sold by the
mortgagee or trustee under power of sale contained in the mortgage or
deed of trust.
This section does not apply to any deed of trust, mortgage or
other lien given to secure the payment of bonds or other evidences of
indebtedness authorized or permitted to be issued by the
Commissioner of Corporations, or which is made by a public utility
subject to the Public Utilities Act (Part 1 (commencing with Section
201) of Division 1 of the Public Utilities Code).
However California Code of Civil Procedure section 580.5. (b) With respect to an obligation which is secured by a mortgage
or a deed of trust upon real property or an estate for years therein
and which is also supported by a letter of credit, neither the
presentment, receipt of payment, or enforcement of a draft or demand
for payment under the letter of credit by the beneficiary of the
letter of credit nor the honor or payment of, or the demand for
reimbursement, receipt of reimbursement or enforcement of any
contractual, statutory or other reimbursement obligation relating to,
the letter of credit by the issuer of the letter of credit shall,
whether done before or after the judicial or nonjudicial foreclosure
of the mortgage or deed of trust or conveyance in lieu thereof,
constitute any of the following:
(1) An action within the meaning of subdivision (a) of Section
726.
Thus there is no single action (or action at all) and no cutting off of the debt by "conversion to non-recourse" under 580(d).
Thus it is my understanding that even if in bankruptcy, a deed in lieu of a debt that was a recourse debt will require the filing under IRC section 108 of a statement of reduction of attributes which will cost them in future.
Therefore it would seem that as I read all these articles and reasonings, that because non-judicial forclosure extinguishes the state source of the obligation (making the debt non-recourse from a tax standpoint only) that it eliminates the need for sec 108 attribute reduction.
I also direct you to IRS Pub 4681 where abandonment (foreclosure) is distinguished from deed-in-Lieu.
Hope this helps.
Curt Harrington
http://patentax.com
(I will try to attach the Lit Section email if I can)
@yahoogroups.com">cdcbaa@yahoogroups.com, Holly Roark <hollyroark22@...> wrote:
>
> Client is surrendering a deeded time share. Lender has provided deed
> in lieu documents. Discharge has not yet been entered but we expect
> the debtors will receive a discharge. Is there a tax consequence to
> the debtors signing the postpetition deed in lieu?
>
> --
> Sent from my mobile device
>
> Holly Roark
> holly@...
> www.roarklawoffices.com
> Central District of California
> Consumer Bankruptcy Attorney
> 1875 Century Park East, Suite 600
> Los Angeles, CA 90067
> T (310) 553-2600
> F (310) 553-2601
>
The post was migrated from Yahoo.