Tax issues

QRPBI Exception Calculations

Two calculations must be applied that limit the amount of excludable cancellation of debt income when utilizing the qualified real property business indebtedness exception to COD income. While these calculations are complex and not comprehensively covered in this article, this brief overview shows how the calculations required with this COD income exception often render it useless.

First, the QRPBI exception limits the COD income amount that can be excluded to the excess of the outstanding principal amount of the debt (immediately before the discharge) over the current market value of the property securing the debt. In applying this limitation, the property’s market value is first reduced by the outstanding principal amount of any other QRPBI that is secured by the same property.

Second, the QRPBI exception limits the amount of COD income that can be excluded to the aggregate adjusted basis of depreciable real property held by the taxpayer immediately before the debt discharge, which basis first is reduced by any basis reduction occurring as a result of the application of the bankruptcy or insolvency COD income exclusions.

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