forclosure/deed in lieu question

[michaelmars]

Senario:

Client owns a building an an S corp -0- basis due to a 1031 10 years ago. He owes bank $3,000,000. There are no personal gurantees on the mtge.

General questions:

How is the gain calculated -does it follow the same rules as a partnership?

Can any debt forgiveness be allocated to basis in other properties?

Assuming he is insolvent at the time should he declare bankruptcy first?

Yes we will be hiring a bankruptcy attorney but i just want to get an idea of the issues first.

[jainen]

>>Client owns a building an an S corp<<

I don't understand if you are asking about the corporation, the shareholder, or both. Do you mean that this is a non-recourse loan, or just that the shareholder does not guarantee it? For a non-recourse loan, the property satisfies the debt in full, and the sale (presumably for the outstanding balance) is reported in the normal way.

See what the attorney has to say. There may be a lot of capital gains tax that can't be discharged in bankruptcy.

[michaelmars]

>>Client owns a building an an S corp<<

I don't understand if you are asking about the corporation, the shareholder, or both. Do you mean that this is a non-recourse loan, or just that the shareholder does not guarantee it? For a non-recourse loan, the property satisfies the debt in full, and the sale (presumably for the outstanding balance) is reported in the normal way.

See what the attorney has to say. There may be a lot of capital gains tax that can't be discharged in bankruptcy.

its non recourse. There is no sale unless you mean the debt forgiveness. The bank forgives $3mil and his basis his basis of the building is -0-. No outside basis either. retained earnings are less than 10,000.

Since he owns 100% of the stock whether the builing pays tax or him personally, its really the same pocket.

So far he is current but wants an outline of his options.

[jainen]

>>The bank forgives $3 mil<<

As I understood the original post, the bank won't forgive anything. They will take the property in full satisfaction of the debt, according to the terms of the note. The corporation will report this as a sale for $3,000,000 against zero basis. As to whether "its really the same pocket" for payment of the tax, I will defer to the attorney.

[michaelmars]

sorry for the misspeak, yep its not forgiveness, the bank will take the property. so my questions become is it treated as a sale with 0- basis or does he pick up the difference between the 3 mil and what the bank sells the buildign for. Also is a deed in liu better than defaulting and letting the bank forclose or just filing for bankruptcy for the corporation.

i agree that an attorney will ultimately instruct us on how it should go but sometimes attorneys are wrong and alos sometimes we just need to make sure we are asking the right questions. I think the above are the only 3 various situations available.

[jainen]

>>sometimes attorneys are wrong<<

So true, so true--but fortunately you can always count on the Internet!

I already answered about treating it as a sale. Which deed is best is generally a matter of local law and personal goals. As for other options, if the bank can sell it so can he, and there are unlimited forms of alternative financing (but sadly not unlimited funds), and basically I think you ought to let the attorney ask the questions.