Contractor’s Toolbox – Debt relief also brings tax implications

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Abstract: As the economy continues to struggle, many contractors are asking their lenders for debt relief. Often, restructuring debt is in the best interest of both borrower and lender. But contractors who are discussing workout options with their lender should be sure to consider the tax implications. Even if their property has declined in value, a foreclosure or debt workout can result in taxable cancellation-of-debt (COD) income for recourse loans, or capital gains for nonrecourse loans. There are ways to avoid or defer COD income, but the rules are complex.