Deduction for certain payments made reduce debt on commercial real property

(a)

In general

Part VI of subchapter B of chapter 1 of the Internal Revenue Code of 1986 (relating to additional itemized deductions for individuals and corporations) is amended by adding at the end the following new section:

199A.

Deduction for payments made to reduce debt on commercial real property

(a)

In general

There shall be allowed as a deduction an amount equal to 50 percent of any qualified debt reduction payment made during the taxable year by the taxpayer with respect to qualified indebtedness on eligible commercial real property held by the taxpayer. (b)

Maximum deduction

The deduction allowed by subsection (a) for any taxable year shall not exceed, with respect to each eligible commercial real property, whichever of the following amounts is the least: (1)The amount equal to 50 percent of the excess (if any) of— (A)the amount of the qualified indebtedness secured by such property as of the beginning of such taxable year (reduced by amounts required to be paid under the terms of the loan during such taxable year), over (B)50 percent of the fair market value of such property as of the close of the taxable year. (2)$10,000,000. (3)The adjusted basis of such property as of the close of such taxable year (determined without regard to qualified debt reduction payments made during the taxable year and depreciation for such year). (c)

Eligible commercial real property

For purposes of this section, the term eligible commercial real property means any commercial real property if— (1)as of the beginning of the taxable year, the amount of the qualified indebtedness secured by such property is at least equal to 85 percent of the fair market value of the property, or (2)such property is, or is reasonably expected to be, treated as being in an in-substance foreclosure by the Comptroller of the Currency. (d)

Qualified debt reduction payment

For purposes of this section, the term qualified debt reduction payment means the amount of cash paid by the taxpayer during the taxable year to reduce the principal amount of qualified indebtedness of the taxpayer but only to the extent such amount exceeds the amounts required to be paid under the terms of the loan during such taxable year. (e)

Property held by a partnership

(1)

In general

In the case of property held by a partnership, a qualified debt reduction payment by the partnership may be taken into account under this section only if— (A)such payment is attributable to a qualified equity investment made by a partner in such partnership, and (B)any deduction under this section which is attributable to such investment is properly allocated to such partner under section 704(b). (2)

Qualified equity investment

For purposes of this section— (A)

In general

The term qualified equity investment means any equity investment (as defined in section 45D(b)(6)) in a partnership if— (i)such investment is acquired by the partner at its original issue (directly or through an underwriter) solely in exchange for cash, (ii)at least 80 percent of such cash is used by the partnership to reduce the principal amount of qualified indebtedness of the partnership, (iii)the portion of such cash not so used is used by the partnership for improvements to commercial real property held by the partnership, and (iv)the person or persons otherwise entitled to depreciation with respect to the portion of the basis of the property being reduced under subsection (g)(1) consent to such reduction. (B)

Redemptions

A rule similar to the rule of section 1202(c)(3) shall apply for purposes of this paragraph. (f)

Other definitions

For purposes of this section— (1)

Qualified indebtedness

The term qualified indebtedness means any indebtedness— (A)which is incurred or assumed by the taxpayer on or before January 1, 2009, and (B)which is secured by commercial real property held by the taxpayer at the time the qualified debt reduction equity payment is made by the taxpayer. (2)

Commercial real property

The term commercial real property means section 1250 property (as defined in section 1250(c)); except that such term shall not include residential rental property (as defined in section 168(e)(2)) unless the building contains at least 3 dwelling units. (g)

Application of section 1250

For purposes of determining the depreciation adjustments under section 1250 with respect to any property— (1)the deduction allowed by this section shall be treated as a deduction for depreciation, and (2)the depreciation adjustments in respect of such property shall include all deductions allowed by this section to all taxpayers by reason of reducing the debt secured by such property. (h)

Special rules

(1)

Basis reduction

The basis of any property with respect to which any qualified debt reduction payment is made shall be reduced by the amount of the deduction allowed by this section by reason of such payment. (2)

Refinancings

The indebtedness described in subsection (f)(1)(A) shall include indebtedness resulting from the refinancing of indebtedness described in such subsection (or this sentence), but only to the extent it does not exceed the amount of the indebtedness being refinanced. (3)

Denial of deduction for debt-financed payments

No deduction shall be allowed by this section for any qualified debt reduction payment— (A)to the extent indebtedness is incurred or continued by the taxpayer to make such payment, and (B)in the case of a qualified debt reduction payment made by a partnership on qualified indebtedness on commercial real property held by the partnership, to the extent of indebtedness— (i)which is incurred or continued by any partner to whom such payment is allocable, and (ii)which is secured by such partner’s interest in the partnership or by such commercial real property. (4)

Treatment of amounts required to be paid by reason of loan default

For purposes of subsections (b)(1)(A) and (d), accelerated payments required to be made under the terms of a loan solely by reason of a default on the loan shall not be taken into account. (5)

Recapture of deduction if additional debt within 3 years

(A)

In general

If a taxpayer incurs any additional debt within 3 years after the date that the taxpayer made a qualified debt reduction payment, the ordinary income of the taxpayer making such payment shall be increased by the applicable percentage of the recaptured deduction. (B)

Recaptured deduction

For purposed of this paragraph, the recaptured deduction is the excess of— (i)the deduction allowed by subsection (a) on account of a qualified debt reduction payment, over (ii)the deduction which would have been so allowed if such payment had been reduced by the additional debt. (C)

Applicable percentage

The applicable percentage shall be determined in accordance with the following table: If, of the 3 years referred to inThe applicable subparagraph (A), the additionalpercentage is: debt occurs during the: 1st such year100 2d such year66 2/3 3d such year33 1/3.

(D)

Partnerships

(i)

Allocation of income inclusion

Any increase in the ordinary income of a partnership by reason of this paragraph shall be allocated (under regulations prescribed by the Secretary) among the partners receiving a deduction under this section by reason of making qualified equity investments in the partnership. (ii)

Debt-financed equity investment by partner

Rules similar to the rules of the paragraph shall apply in cases where additional debt is incurred by a partner making a qualified equity investment in a partnership. (E)

Subsequent deprecation

The deductions under section 168 for periods after a recaptured deduction under this paragraph shall be determined as if the portion of the qualified debt reduction payment allocable to the recaptured deduction had never been made. (6)

Recapture where partner disposes of interest in partnership

If any partner to whom a deduction under this section is allocable by reason of making a qualified equity investment in a partnership disposes of any portion of such partner’s interest in the partnership within 1 year after the date such investment was made, the ordinary income of such partner shall be increased by the amount which bears the same ratio to the deduction allowed on account of such investment as such portion bears to such partner’s interest in the partnership immediately before such disposition. (7)

Exemption from passive loss rules

Section 469 shall not apply to the deduction allowed by this section. (i)

Application of section

This section shall apply to qualified debt reduction payments made within the 2-year period beginning on the day after the date of the enactment of this section.

(b)

Earnings and profits

Subsection (k) of section 312 of such Code is amended by adding at the end the following new paragraph:

(6)

Treatment of section 199A

Paragraphs (1) and (3) shall not apply to the deduction allowed by section 199A.

(c)

Clerical amendment

The table of sections for part VI of subchapter B of chapter 1 of such Code is amended by adding at the end the following new item:

Sec. 199A. Deduction for payments made to reduce debt on commercial real property..

(d)

Effective date

The amendments made by this section shall apply to taxable years ending after the date of the enactment of this Act.