Finance  ·  Distress

House Bill Would Create Tax Incentive for CRE Loan Modifications and Debt Workouts

The legislation has gained support from the Real Estate Roundtable, an industry trade group


A bill introduced in the U.S. House of Representatives would amend the tax code to make it easier for commercial real estate borrowers to defer taxes applied to their properties during loan modifications or debt workouts. The bill aims to reduce some of the distress associated with the upcoming wave of commercial real estate loan maturities. 

The bipartisan bill, HR 558O, was introduced Sept. 19 by Rep. Claudia Tenney (D-NY) and Rep. Brian Higgins (R-NY), and co-sponsored by Rep. Mike Lawler (R-NY) and Rep. Pat Ryan (D-NY). Tenney and Higgins represent upstate congressional districts in the Buffalo area, while Lawler and Ryan represent districts in the Hudson Valley.

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HR 5580 would amend Section 108(a)(1) of the tax code, which since 1986 has allowed noncorporate taxpayers such as small business owners to defer the tax incurred on loan modifications or workouts when their property depreciates. Both Tenney and Higgins sit on the House Ways and Means Committee, which controls the nation’s tax-writing process. 

The Tenney-Higgins bill zeroes in on existing cancellation of debt (COD) income policy, which treats debt forgiveness as a taxable event, where corporate borrowers, such as those who own office buildings or retail malls, are taxed on the amount canceled. Current policy allows some leeway, as borrowers can reduce their taxable basis by the amount of debt canceled, resulting in smaller depreciation deductions but higher capital gains upon a future sale.  

Real Estate Roundtable President and CEO Jeffrey DeBoer, a supporter of the legislation, noted that during COVID-19 the federal government encouraged workout modifications of borrowers of federal loans by suspending the repayment of federal debts and imposing temporary foreclosure moratoriums on federally backed loans. 

“From the tax law to banking regulation, housing policy and other areas, public policy has always encouraged the restructuring of unsustainable loans to help businesses turn around and help taxpayers get back on their feet,” said DeBoer, in a statement. 

HR 5580 would expand the current COD policies to include commercial real estate loans taken out before March 1, 2022, and canceled between 2023 and 2027. 

The impetus for the legislation is likely the $1.5 trillion on commercial real estate debt that comes due between 2023 and 2025, as forecast by Morgan Stanley (MS). Industry maturities are expected to peak at $550 billion in 2027. Morgan Stanley has predicted that values for retail and offices could fall by more than 40 percent in that time, heightening the possibility of sector-wide defaults and lenders carrying dead assets. 

With so many defaults imminent, by creating a tax incentive to induce loan modifications and debt workouts, the Tenney-Higgins bill could be one way of tempering the widespread distress. 

“Debt workouts between lenders and borrowers are a critical part of the solution,” DeBoer said. “Workouts can ensure that these properties continue supporting jobs and economic activity.” 

Any bill introduced in the House must secure passage in the upper chamber U.S. Senate, and be signed by President Joe Biden before it can become law. 

Neither Rep. Tenney nor Rep. Higgins responded to a request for comment. 

Brian Pascus can be reached at