All real estate may not be subject to new COD rules.

• Author: Bottiglieri, Tom
• Position: Cancellation of indebtedness - Brief Article

A provision in the Revenue Reconciliation Act of 1993 gives taxpayers other than C corporations the ability to exclude from taxable income cancellation of debt (COD) income if certain tests are met.

One of the requirements is that the debt must be on property used in a business. But is property subject to a net lease considered used in a business or investment property? Letter Ruling 9426006 implies that net lease property is not business property and thus would not qualify for the exclusion.

The debt must be incurred or assumed in connection with real property used in a business. In this respect, the rental of even a single property may constitute a business. Citing Rev. Rul. 73-522, however, the IRS stated that the rental of real property under a net lease does not render the owner engaged in a business.

The issue in Rev. Rul. 73-522 was whether a nonresident alien was...