Pre-Paid loan fees - Reduction of Basis for COD?

[BulldogTom]

Taxpayer has COD income. The COD came from the forclosure on real estate used in his business. He has PP Loan Fees on the balance sheet from the financing of the property in 2003. Now the loan is gone. Normally, you would take the remaining balance of the PP Loan Fees in the year the loan goes away. Do I have to reduce the basis in this asset before disposing of it?

I think so, but my research is not giving me a clear answer. It says to reduce the basis in depreciable assets. This asset is amortizable.

Am I splitting hairs? It is about 5K that I can use on his Sch. C if I can write them off without reducing their basis.

Thanks

Tom

Lodi, CA

[LindaB]

How would you treat these loan fees if he had just sold the property?

[BulldogTom]

I would have deducted them on his Schedule C.

Tom

Lodi, CA

[LindaB]

If I'm following you, I think you're talking about reducing basis as a result of excluding COD income--reducing tax attributes. The way I see it, by the time you get to that point, the property has already been 'sold' and you don't have any basis to reduce, on that property anyway. I'd go with the deduction on Sch. C.

[Bart]

When you have COD excluded from income you have gotten a tax break. Seems to me the idea of reducing tax attributes keeps you from getting a second (double) tax break. I would think that deducting the prepaid loan fees is double dipping. It also seems to me that the prepaid loan fees were paid for with the loan that is now forgiven. Seems you are going to deduct something that is now not even paid for.

[jainen]

>>Am I splitting hairs?<<

I think you are. The foreclosure is treated as a sale, and (assuming the loan was cancelled) the balance of unamortized points is deductible in the ordinary way. Remember, either the points represent an actual cash payment at time of purchase, or they were added to the loan amount and became part of the foreclosure and C.O.D. income, so he is not double-dipping. Take the deduction.