Distressed Asset Tax Solutions

Property owners facing mortgage foreclosure face the uncomfortable problem of generating cancellation of indebtedness “phantom” income taxed as ordinary income at the taxpayer’s ordinary income rate. In a foreclosure or deed-in-lieu event the IRS deems the transaction a sale to the lender for the outstanding loan amount. Typically, however, the property owner receives no cash to cover the tax obligation.

The tax on cancelled debt can be avoided by structuring a sale to the lender for the outstanding loan balance.  The sale is conducted as a 1031 exchange through a qualified intermediary.  Investment grade credit tenant property can be purchased as 1031 replacement property for 6-15% equity above the mortgage amount. While new equity must be contributed to purchase the new highly levered credit tenant property, significant tax savings are realized.

The investor deferred tax and now owns credit tenant property allowing passive ownership, no management responsibility, guaranteed rent payment backed by corporate credit, and a liquid trading market should the investor’s situation change.

Credit Tenant Capital is expert at assisting owners of low basis distressed assets mitigate their tax exposure through the use of highly levered credit tenant property. We are committed to providing sophisticated finance and tax structures to help our clients manage the tax effects of the foreclosure process.