Accelerating Losses with an Assignment for the Benefit of Creditors

When a partnership or S corporation has losses, the owners can use those losses to reduce their taxes, especially if they have enough investment in the business. Developers and home builders have been experiencing losses due to the economic downturn, and they can use these losses to get a tax refund. However, they need to be careful about when they recognize these losses to get the maximum benefit. For developers, they can only recognize losses when they sell their real estate properties, and if the properties are worth less than what the developer paid for them, they can get a tax refund. When a developer sells or loses property in a bankruptcy, they can recognize the loss for tax purposes when the sale or transfer actually happens. However, these events can be delayed due to a variety of reasons, and if the sale or transfer happens in a different tax year, the developer may not be able to get as much of a tax refund. In a bankruptcy, the developer still owns the property until it’s sold by the trustee, and the process of selling the property in a bankruptcy can also take a long time, potentially causing a delay in recognizing the loss for tax purposes. When a developer loses property through foreclosure or abandonment, they have to report it on their taxes. If they lose the property in a foreclosure sale, they have to pay taxes on the amount of debt forgiven by the bank, and they can claim a loss on their taxes for the difference between what they owed on the property and what it was worth. If they abandon the property, they can also claim a loss on their taxes for the property’s value. The timing of when they report the loss depends on when the foreclosure or abandonment happens, and it can affect how much money they get back on their taxes. When a developer gives up on real estate, they usually suffer a regular loss. However, if they get something in return or the property is a special kind, it could be a capital loss instead. Capital losses aren’t as good for taxes. But if a developer wants to speed up the loss and get a tax refund, they can show they meant to give up on the property and do something to prove it. By using a legal form called an assignment of assets, they can make this happen faster than other options like selling or going through a foreclosure. The real estate that the developer is leaving may have unpaid loans and a tax basis that is more than the unpaid loan amount. If the developer abandons the real estate, they may choose to consider the unpaid loan as money they received from the abandonment, which would reduce their loss for tax purposes. To abandon the real estate and avoid the tax consequences, the developer can’t continue to have any control or ownership over the property. The developer also can’t have a right to any leftover money from the property. If the developer gives up their right to any extra money from the property, it’s less likely that the IRS can say that the property is still under the developer’s control. The form of assignment should be modified to make it clear that the Assignor is giving up all rights to the assets being assigned to the Assignee, including any remaining money after all debts are paid. This will help the developer to show that they intended to abandon the assets, which is necessary for tax purposes. If a business or person abandons property that they were using for profit, they can deduct the loss on their taxes. To do this, they need to have clear evidence that they intended to abandon the property and took a definite action to do so. This can help reduce the amount of taxes they owe. After the Taxpayer gave up their assets in a bankruptcy proceeding, they were able to reduce the value of those assets for tax purposes. This is because they effectively abandoned the assets and can claim a loss on their taxes. This rule applies because the Taxpayer was a developer and the loss was not on a capital asset. During tough economic times, developers and home builders may need to find new ways to make money, like getting a tax refund by recognizing losses from previous years. If a developer’s property value has gone down and they want to recognize the loss sooner, they can use a legal process called an ABC proceeding to do that. However, they need to make sure that the assignment in the ABC proceeding doesn’t give them any extra benefits. If there’s no specific tax law about recognizing the loss, they should report it on a specific tax form to avoid penalties. Also, if a taxpayer had income in 2006 but not in 2007 or 2008, it’s important for them to recognize any losses in 2008 so they can get a tax refund. This can only apply to individual bankruptcy under specific chapters, and not for partnerships or S corporations. This section of the tax code talks about how losses from selling certain types of assets, like property or contracts, are treated differently for taxes. It also explains that there are limits on how much of these losses can be used to offset gains. Real estate owned by a developer for selling to customers doesn’t count as a capital asset, so there are special rules for that, too. If a developer’s mortgage is more than the value of the property, they won’t have a loss when they abandon it. If a fund is set aside for creditors in a bankruptcy case, it may be taxable as a trust. The IRS has rules about when a person is considered the owner of a trust, such as if they may get the money within 10 years or if they can receive the income from the trust. Other court cases have also dealt with similar issues. Thomas O. Wells, a tax lawyer and CPA, has a lot of experience in this area and has been recognized for his work. Joseph R. Schortz is a certified public accountant with over 35 years of experience. He works at a firm in Port Charlotte and is licensed to practice in Florida and New Jersey. He is a member of several professional organizations and has served on various committees for them. This column is on behalf of the Tax Section.

Source: https://www.floridabar.org/the-florida-bar-journal/accelerating-losses-with-an-assignment-for-the-benefit-of-creditors/