IRS Creates New Disregarded Entity Exclusion from Debt Cancellation Income

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The IRS has announced a new safe harbor from the discharge of debt income rules.

Debt that is cancelled, discharged or forgiven is generally taxable as income, but there are exceptions. Under one exception, certain income from discharge of certain debt secured by real estate can be excluded from gross income. Under the new safe harbor, debt secured by ownership interests in an entity holding the real estate may be treated as if it were secured by the real estate itself. To qualify, the secured interest must be in a wholly-owned, tax-disregarded entity, such as a single member LLC.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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