When borrowers face a financial outlook that is less than promising, it is important for them to consider the potential negative tax consequences of phantom gain and cancellation of debt.
Phantom gain refers to a situation where a borrower is deemed to have realized a gain for tax purposes, even though no actual cash or property was received. This can occur when a borrower sells a property for less than the outstanding debt owed on it, resulting in a debt forgiveness amount that is considered taxable income.
Cancellation of debt, or COD, occurs when a lender forgives all or a portion of a borrower's debt. This forgiven debt is also considered taxable income and must be reported on the borrower's tax return.
It is important for borrowers to be aware of these potential tax consequences and to seek the advice of a qualified tax professional before making any decisions that may result in phantom gain or cancellation of debt. There may be ways to minimize or defer these tax liabilities, and a tax professional can help borrowers navigate these complex issues.
It doesn't matter if you are giving the keys back on commercial or residential real estate the consequences are the same:
The forgiveness is considered income gain.
Credit will show the negative event.
Results may be more painful long term.
