The Office of the Chief Counsel of the Internal Revenue Service has issued a Legal Memorandum (Number AM2013-001, dated March 1, 2013) (the “Memorandum”), which has important implications and represents a victory for lenders who have acquired Other Real Estate Owned (“OREO”) through foreclosure or deeds in lieu of foreclosure. The Memorandum appears to reverse an August 12, 2012 Field Attorney Advice issued by Associate Area Counsel in Detroit, Michigan (FAA 20123201F) that held costs associated with OREO property must be capitalized under I.R.C. §263A.
Generally, after a borrower defaults on a mortgage loan, the lender will commence foreclosure proceedings against the property for the purpose of acquiring title to the property. Often, a borrower may voluntarily transfer title to the property through a “deed in lieu of foreclosure” in exchange for a release of the remaining debt obligation in excess of the value of the property at the time of the deed in lieu of foreclosure. The Memorandum addresses the issue of whether property acquired through foreclosure or by deed in lieu of foreclosure is considered to be acquired for resale to customers in the ordinary course of the bank’s business. Historically, many banks have deducted expenses associated with OREO property currently rather than capitalizing them.
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