On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act of 2009 ("ARRA"). One of the significant Federal income tax changes included in ARRA was a provision allowing certain taxpayers to elect to defer the tax liability associated with certain "cancellation of debt" ("COD") income incurred in 2009 and 2010. The deferral election generally applies fairly broadly to COD income that is triggered with respect to debt instruments that are either completely forgiven, modified to provide for a reduced principal amount, or reacquired by the issuer (or a related party) in exchange for a cash payment, another debt instrument, corporate stock or a partnership interest, or as a contribution to capital. If the deferral election is properly made, any qualifying COD income realized in 2009 or 2010 will be recognized for tax purposes ratably over the 5-year period beginning in 2014 and ending in 2018 (inclusive).

As broad as the new provision is, however, the reacquisition of a debt instrument in exchange for property other than cash does not appear to be covered. As a result, the new deferral election would apparently not be available to a real estate investor seeking to discharge a secured debt by delivering a deed in lieu of foreclosure. To the extent that a debtor may be considering a deed in lieu transaction to discharge mortgage debt at a discount, it may be desirable to consult with tax counsel to see if the transaction could potentially be restructured in a manner that could qualify for the deferral election.