How to Defer Capital Gains Tax Liability on a Commercial Foreclosure


How to Defer Capital Gains Tax Liability on a Commercial Foreclosure

Unsuspecting commercial investors are driving to the bank to turn in their keys on projects that did not workout as planned and waking up the following year with an unexpected tax headache. The discharge of the loan can result in a capital gains tax liability. Not only did the clients lose whatever equity they had in the property, but they also face capital gains tax liability for simply how they transferred the property to the bank!


Individuals confuse the property’s tax impacts with the property’s economics. However, these two calculations are different. For tax purposes gain or loss equals the difference between the transfer price to the bank and the adjusted basis. Thus, if you bought a property in 1987 for 700k (your cost basis) and it has been depreciated and now has an adjusted basis of $400K, and it is foreclosed with a 950k loan, this transfer without a 1031 exchange results in a taxable gain of $550K, i.e. $950k transfer price minus the $400K adjusted basis.  ES Group is a Qualified Intermediary pursuant to Internal Revenue Code §1031.                                                                                                              ES Group corresponds with each client’s attorney and/or tax advisor and forwards legal documentation, as requested, so that the Internal Revenue Code §1031 rules and regulations are thoroughly understood. ES Group prepares the necessary documentation- Exchange Agreements, Assignment Agreements, Notice of Assignments, and oversees each closing to assist in proper §1031 procedures. ES Group provides guidance, information and critical timelines throughout the entire exchange.

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