Tax implications on Contract Settlement

[Michael Moikeha]

I have an interesting situation and my accountant is working to figure it out, but I would like to see if anyone has had experience or has insight they can help with.

I have 2 contracts with one lender.

They had 1031 exchange funds and we worked a deal where they bought the property and we had a 30 year lease option with an owner carry purchase which could take place after 2 years. This is with me as an individual”. We could purchase for $250k and it’s current value is around $375k.

With company “B”, solely owned by me as an individual, we have a $100k unsecured business loan which was used across a few flips.

We have come to a disagreement and have a settlement agreement written out where we release our rights to the lease option in exchange as payment for the note.

Our accountant is saying that the “forgiveness” of the debt constitutes a profit of $100k. But that she is unsure how to equalize it or show a personal loss between the $250k contract cost and $375k value of the equitable rights as they are not in the same entity, and as I don’t own the property, she doesn’t know how to put a value on the contract for tax purposes.

I would imagine the value is being established through the settlement and agreed upon exchange of contracts.