List of Information Needed To Assess Tax Effects of Workouts and Foreclosures
While the nature of the collateral securing a loan may change, while the local market may change, while the number and nature of the lenders in the credit stack may change, while "X" (you fill in the "X") may change, ONE thing never changes . . . .
. . . income taxes.
And I suspect that the impact of debt restructures (and foreclosures) on income taxes will become more and more important in the future. But let's not overlook the importance of this topic today.
In prior postings, we've touched on the importance of income tax issues, including cancellation of debt income and other "bad" consequences [2nd of two postings].
Below is a list furnished by a partner of mine, Julie Sassenrath. Julie has in-depth knowledge of the tax code, case law and IRS rulings, and has a very, very practical bent. She uses variations of this list as a starting point to assess the tax consequences of a specific workout or foreclosure.
Collecting this information often is a key element in any debt restructuring plan, whether you are the key principal behind the borrower, or the asset manager pursuing the recovery of the Lender's investment.
Here is Julie's quick list:
- Amount of debt (principal and accrued but unpaid interest)
- Has accrued but unpaid interest been deducted?
- Recourse v. non-recourse nature of the debt
- Guarantors or other persons liable for debt (and relationship to partners), and nature of liability
- Basis of the property (collateral)
- Basis of partnership interests of the partners
- How has the debt been allocated among the partners for tax/basis purposes?
- Identity of the partners (and their partners if a partnership) and ownership interests
- Financial status of each partner (solvent, insolvent, bankrupt, etc.)
- Tax attributes of each partner (NOLs, passive losses, capital losses, etc.) and overall tax picture of each partner
- Other real estate interests held by each partner
- Other assets held by the partnership
- Fair market value of the property (collateral)
If and when you focus on income taxes in a plan, be sure to contact an experienced adviser.
Frankly, I am NOT familiar with this topic. When faced with this topic, I quickly reach out to Julie or another tax lawyer at my law firm for help.
If you have information or questions to add to this list, please post a comment below.
