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Discussion:Basis Adj on Unstated Interest or OID

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Discussion Forum Index --> Advanced Tax Questions --> Basis Adj on Unstated Interest or OID


Discussion Forum Index --> Tax Questions --> Basis Adj on Unstated Interest or OID

Paul V (talk|edits) said:

25 November 2011
I have a situation where a buyer purchased land & building for $3 million with a seller financed note for 30 yrs. There is no stated interest on the installment agreement but am using AFR for interest rate. I am trying to determine if the imputed interest amount on the monthly payments reduces the basis on the property when taking the interest deduction on the tax return.

I have read if the interest is considered OID, then it does reduce the basis by reducing the purchase price of the property by the unstated interest. But I was told by a professor, if the interest is not OID, then no reduction in basis. I cant find this statement anywhere. Is there any clarification on this matter to determine how to treat the unstated interest? Thank you.

Trillium (talk|edits) said:

25 November 2011
Search suggestion: "imputed interest" OID basis.

Belle (talk|edits) said:

November 26, 2011
Here's one that Trillium's link seems to have missed.

Discussion:OID Installment Oblig?

Spell Czech (talk|edits) said:

26 November 2011
If I understand your question then the answer goes like this: The buyer will be paying, in total, for land and building and interest, $3M. After you apply the AFR rules, and you have determined how much of the $3M is interest, only the rest of the $3M - the part that isn't interest - will be basis in the land and building. I think that's the basis reduction that you're asking about.

For example, if the interest part of the $3M comes to $1,246,579, after you apply the unstated interest rules to the stream of payments, then the basis of the property bought is going to be $1,753,421. The interest amount reduces the basis of the property, for sure.

And you'll have to split that "reduced" basis between land and building based on fair market value. Do the land and building together make up a "business" that might have some intangible value like goodwill or a client base?

You might want to suggest to the buyer (is he your client?) that he and the seller compare how they're treating the "principal" and the "interest" in this "no interest" note. It might be a delicate conversation, however, if they're not simpatico already.

Paul V (talk|edits) said:

26 November 2011
Thank you for your replies, my client purchased a hotel and is leasing it back to the restaurant and operations in which he owns and operates as separate LLC's. In reseaching this issue, I have read Sec 1274 OID interest, Pub 537 in which you are referring above. But Im wondering if Sect 1274 does not apply, I do not need to reduce the cost basis and make no adj. Would that be Sect 483? ie; cash method T/P, prin less than $3.6 mill, issuer/lender treat interest under cash method. The seller is reporting the interest as unstated interest income and the buyer is deducting the same amount. I have looked at Pub 1212 also with no avail.

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