CARES Act tax issues for real estate

The CARES Act includes provisions affecting real estate borrowers, lenders, landlords and tenants. Much attention has been given to the forgiveness of loans made under the Paycheck Protection Program designed to keep workers employed but also to allow businesses to continue to make rent and mortgage payments.

In addition, borrowers under federally backed residential loans can request forbearance for a period of, and a moratorium was placed on, some foreclosures. See the prior Real Estate Recovery Team alert for a detailed, state-by-state discussion of such moratoriums.

Both the PPP loan program and the forbearance mandate raise tax issues. The CARES Act included a provision that exempted amounts forgiven under the PPP loan program from creating taxable income for the borrower. In addition, the required forbearance could have created issues for loans held in securitization vehicles, but the IRS recently released Revenue Procedure 2020-26 to grant relief in that area.

These provisions are a reminder of the importance of addressing tax issues in real estate workouts. While many borrowers are dealing with the potential loss of their properties, they also need to plan for the potential tax hit from the cancellation of their loans should their properties be foreclosed, which can trigger gain on the deemed sale of a foreclosed property and ordinary income from the cancellation of the debt without repayment. 

Short of foreclosure, restructured loans that are significantly modified also have important tax ramifications for both the borrower and the lender because the existing loan is deemed exchanged for a new loan with new terms. Many factors affect the tax treatment of a restructured loans, including whether the loan is recourse or non-recourse, whether the debtor is an individual, a partnership or a corporation, and whether the property securing the loan is held for investment, for development or otherwise part of a trade or business. 

As borrowers and lenders work through the issues and distress raised by the current economic crisis, borrowers would be well served to carefully consider the possible tax costs of restructuring or terminating their loans to mitigate the additional burden of taxes going forward.

The McDonald Hopkins Real Estate Recovery Team is staying up to date on the rapidly developing hurdles for real estate owners, lenders and tenants during this difficult time.  If your real estate is impacted by the massive dislocations caused by this economic shutdown, and you would like to know how we can help you with your real estate or any related federal, state or local tax issues, please reach out to any of the attorneys listed below.