While cancellation of indebtedness generally results in ordinary income for the debtor (COD income), the Internal Revenue Code provides for several exceptions under which COD income can be excluded. Of particular importance for owners of real estate is Section 108(c), under which a taxpayer can elect to exclude COD income that results from the discharge of “qualified real property business indebtedness” (QRPBI) under certain circumstances. The IRS recently interpreted one of the requirements for debt to constitute QRPBI in a manner that will cause debt secured by condominium units held for sale to fail to qualify.
Background
Under Code Section 108(c), a taxpayer can elect for debt to be QRPBI if (i) the debt was incurred or assumed by the taxpayer “in connection with real property used in a trade or business” and is secured by such real property (the “qualifying real property”) and (ii) the debt was incurred or assumed to acquire, construct, reconstruct, or substantially improve such property.
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