But before borrowers can properly access how this change will help them, more details and guidance needs to be provided by the IRS. Right now the agency is still absorbing the new rule and hasn't issued any guidance, according to Harold Levine, chair of Herrick, Feinstein LLP's tax department in New York City. "We visited them last week and that very day the agents were in a seminar having the rule explained to them," Levine tells GlobeSt.com. The new rule is broadly written, he explains, which means how the IRS interprets it will be crucial.

This is what the rule does say, Levine writes in a client advisory: Under the Recovery Act, on the reacquisition of any applicable debt instrument which occurs after December 31, 2008 and before January 1, 2011, the debtor may elect to report any resulting COD Income ratably over five years. The inclusion period begins as follows:

For reacquisitions occurring in 2009, the fifth tax year following the tax year in which the reacquisition occurs; and
For reacquisitions occurring in 2010, the fourth year following the tax year in which the reacquisition occurs.
An applicable debt instrument is defined as any "debt instrument" that was issued by (i) a C-corporation; or (ii) any other person in connection with the conduct of a trade or business by that person.
The term debt instrument means a bond, debenture, note, certificate, or any other instrument constituting indebtedness.
A reacquisition for any applicable debt instrument means an "acquisition" of a debt instrument by (i) the debtor that issued the debt instrument; or (ii) a related (under the federal income tax laws) person to that debtor.
An acquisition for any debt instrument includes: (i) an acquisition of the debt instrument for cash; (ii) exchange of the debt instrument for another debt instrument; (iii) contribution of the debt instrument to capital; and (iv) the complete forgiveness of the indebtedness by the holder of the debt instrument.

Levine and other attorneys say there are gray areas as the law is currently written. For instance, it is uncertain whether this is an all or nothing proposition: can debtors use the deferral if only part of their debt modification qualifies?

Another question is whether a refinancing and cash out would apply. "Is that debt occurred in trade or business or not," Levine wonders.For his part, Harvey Berenson, managing director at the Schonbraun McCann Group, an FTI company, tells GlobeSt.com he is unsure whether a building under construction can qualify – or does the debtor have to be actually renting out the property.

The good news David Leibowitz, a partner with Lakelaw, a Chicago area bankruptcy law firm, tells GlobeSt.com is that even if and borrowers can't fully realized the benefits of the law, they still will gain some benefits.

"You still should have the opportunity to reduce income recognition. In this environment many people have capital losses to carry forward. It is possible to set off a capital loss against a capital gain realized under COD." Every case is different, though, he adds, especially with real estate partnerships, which tend to be structured according to the particular circumstances.

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Erika Morphy

Erika Morphy has been writing about commercial real estate at GlobeSt.com for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.