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Expert Insights: Construction/real estate

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The construction and real estate industries present a potential legal minefield, particularly in the current economic environment. The Daily Transcript asked two local attorneys to share their expertise in these important sectors, providing insight into how companies might successfully navigate through a tight market.

How does bankruptcy affect short sale proceedings?

Greg Pyke


Best Best & Krieger

Greg Pyke

In the most basic sense, the filing of a bankruptcy in the midst of a short sale transaction would stay that transaction until bankruptcy court approval was obtained.

It would be odd, to be honest with you, for a borrower who's in the midst of a short sale transaction to file bankruptcy, assuming however, that they had approval from their lender to move forward. I suppose if the lender reneged or was not willing to go through with the short sale transaction, at least initially, the borrower might file bankruptcy in order to buy themselves more time. Obviously, it would also stall any foreclosure proceedings or anything else that might be on its way.

But in its purest sense, if the borrower were to file bankruptcy at the same time they're trying to proceed with a short sale transaction, that short sale transaction would have to be approved by the bankruptcy court.

What is the impact of SB 313 workers’ compensation law on contractors?

Kurt Campbell

Shareholder, Chief Real Estate Officer


Kurt Campbell

The California Legislature enacted SB 313 last November, amending section 3722 of the Labor Code relating to workers’ compensation. The law requires every private employer to obtain workers’ compensation insurance. If an employer fails to obtain insurance, the Director of Industrial Relations is required to issue a stop-order prohibiting them from using employee labor. In addition to the stop-order, the director must fine the employer for its failure. The recent amendment increases the fines for lack of workers’ compensation insurance.

Under the old law, the maximum penalty was $1,000 per employee at the time of non-insurance. However, if the employer lacked insurance for over one week, it was required to pay the greater of a) $1,000 per employee or b) two times what it would have paid in workers’ compensation premiums during the uninsured period. The amendment increases the maximum penalty to the greater of a) $1,500 per employee at the time of non-insurance or b) two times the amount it would have paid for workers’ compensation during the three-year period immediately prior to the date of the penalty. The amendment incentivizes the uninsured to obtain insurance, even after penalization by pro-rating the premium to only apply to weeks without coverage. If the employer fails to obtain insurance before paying the penalty, it will pay a higher premium based on its payroll.

This amendment affects contractors in many of the same ways that it affects all employers. The financial consequences for failing to obtain workers’ compensation insurance can be severe, increasingly so after this amendment. Even more importantly for the contractor is that it must continue to ensure that all of its sub-contractors have obtained proper workers’ compensation insurance. Otherwise, a stop-order may be issued against that sub-contractor, resulting in delay and associated expenses for the entire project.

What are the tax consequences of foreclosures and short sales?

Generally, when a homebuyer receives a loan from a commercial lender to purchase a principal residence, the loan is a “non-recourse” loan; if the homebuyer later defaults on the mortgage payments, the lender’s only recourse is to take back the property. The lender cannot pursue the homebuyer personally, and is forced to write off the difference between the balance owed on the home’s mortgage and the ultimate resale price of the home. But for each dollar the commercial lender is forced to write off as a business loss, the IRS forces the homebuyer to record as “phantom income."

In 2007, the federal government passed the federal Mortgage Forgiveness Debt Relief Act, which allows taxpayers to exclude phantom income in calendar years 2007 through 2012. Under the Act, a taxpayer filing as married filing jointly, single, head of household, or widow/widower, may exclude up to $2 million in phantom income ($1 million if married filing separately). In terms of federal obligations, most taxpayers forced to walk away from their mortgages did not, and will not, incur serious tax consequences. For a while, it appeared that California residents might have differing state tax consequences.

California allowed homebuyers to exclude phantom income in 2007 and 2008, but this legislative reprieve expired on Jan. 1, 2009. Many unfortunate Californians were faced with the prospect of paying income tax on hundreds of thousands of dollars in phantom income for fiscal year 2010. Gov. Schwarzenegger signed SB 401, the Conformity Act of 2010, on April 12. The Conformity Act allows a taxpayer filing as married/RDP filing jointly, single head of household, or widow/widower to exclude phantom income of up to $500,000 ($250,000 if married filing separately). This legislation brings California largely in line with the federal Mortgage Forgiveness Debt Relief Act, and allows taxpayers to exclude phantom income from 2009 through 2012.

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