Gift basis and below market rate loan


B

bm30003700

My client is selling an interest in real estate to her
brother for less than fair market value. Further, the sale
will include a note from her brother at a rate less than
applicable federal rate.

If the note were for 100,000, and is payable upon earlier of
brother's death or sale of the real estate, how is the
interest income to my client calculated. For example, if
the applicable federal rate were 6%, and the note was signed
July 1, 2006 with no interest on the loan, would my client
have $3,000 interest income for year 2006, using below
market rate loan rules (100,000 x %6 x 1/2 yr).

Also, would the value of the loan, for purposes of
calculating interest income under below market rate loan
rules, become $103,000 on January 1, 2007, meaning interest
income to my client for year 2007 of $6,180 (6% x 103,000 x
1yr)?
 
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S

Stuart A. Bronstein

My client is selling an interest in real estate to her
brother for less than fair market value. Further, the sale
will include a note from her brother at a rate less than
applicable federal rate.

If the note were for 100,000, and is payable upon earlier of
brother's death or sale of the real estate, how is the
interest income to my client calculated. For example, if
the applicable federal rate were 6%, and the note was signed
July 1, 2006 with no interest on the loan, would my client
have $3,000 interest income for year 2006, using below
market rate loan rules (100,000 x %6 x 1/2 yr).
Sounds like a mess to calculate.

Why doesn't she just sell it for fair market value at the
applicable intrest rate, and forgive $12,000 in payments per
year?

Or depending on the actual value, forgive somewhat less than
that on the payments, and gift the balance as a reduction in
principal balance. The effect would be essentially the same,
but the calculation would be easier and the tax implications
would be less.

Stu
 
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