Selling below market rate loan for discount


B

bm30003700

A few days ago, I asked about a situation where my client
makes a loan to her brother for less than the applicable
federal rate. Under that scenario, my client would need to
take into income each year the difference between what the
interest paid actually was and the applicable federal rate,
until the loan is paid.

Would that also be the case if the loan terms were such that
the loan was payable not later than her brother's death,
and, in fact no payments were made prior to his death?

For example, would my client have to take anything into
income each year if the loan and accumulated interest ended
up being paid in its entirety in ten years?

Also, if my client sold the note to a third party for some
discounted value, what happens then?

Thanks so much for the response to my post a few days back.
Great ideas. Unfortunately, my client's situation doesn't
lend itself to those possibilities.
 
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D

Drew Edmundson

A few days ago, I asked about a situation where my client
makes a loan to her brother for less than the applicable
federal rate. Under that scenario, my client would need to
take into income each year the difference between what the
interest paid actually was and the applicable federal rate,
until the loan is paid.

Would that also be the case if the loan terms were such that
the loan was payable not later than her brother's death,
and, in fact no payments were made prior to his death?

For example, would my client have to take anything into
income each year if the loan and accumulated interest ended
up being paid in its entirety in ten years?
It is called OID. See Sections 1271-1275.

I don't recall your other post. Have you looked at the gift
loan rules? Where the amount includible in income is
limited to the amount of investment income of the borrower?
See 7872(d).
 
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