The Minimum Interest Rate for Mortgages

The price that a purchaser is willing to pay for property will increase if the purchaser can obtain financing on favorable terms, whether the financing is provided directly by the seller, from a third party, or in the assumption of a mortgage. The latter category includes: the buyer acquires the property “subject to the debt” without taking on personal liability; the buyer and seller are jointly or severally liable for the debt; or, the buyer becomes liable for the debt and the seller is released from liability.

Under the Deficit Reduction Act of 1984 (DEFRA), Congress added Section 7872 to the Internal Revenue Code in 1984 so that interest free loans and below market loans would be taxed in accordance with their economic substance. Section 7872 operates by imputing interest on loans that do not charge a market rate of interest.

A loan is any extension of credit including purchase money mortgage, in which the owner of money permits another person to use the money for a period of time after which the money is to be transferred to the owner or applied accordingly to an express or implied agreement with the owner. Treas. Reg. {1.7872-2(a)}.

A taxpayer’s characterization of a transaction as a prepayment or loan is not conclusive. Transactions will be characterized for tax purposes according to their economic substance rather than the terms used to decide them. Id.

A below market loan is a loan that does not require payment of interest at a rate at least equal to the Applicable Federal Rate (AFR). Treas. Reg. {1.7872-3(a)}.

The AFR is divided into three categories: (1) A short-term rate that applies to loans having a maturity of three years or less; (2) A mid-term rate that applies to loans having maturity of more than three years or less than nine years; and (3) A long-term rate that applies to loans having a maturity of nine years or more from the date of issue. Sec. 1274(d).

The rates are determined by the Treasury Department within 15 days after the close of six month periods ending on September 30 and March 31. The rates determined to reflect the average yield for a six month period ending on September 30 are applicable during the six month period beginning on January 1 of the succeeding calendar year. The rates determined to reflect the average yield for the period beginning on the following July 1. Treas. Reg. {1.7872-3(b)(1)}

Sec. 7872 does not apply to any loan which has sufficient states interest. A loan has sufficient interest if it provides for interest on outstanding loan balance as a rate no lower than the applicable Federal rate based on compound period appropriate for the loan. Treas. Reg. {1.7872-3(3)(c)}.

The term demand loan means any loan which is payable in full at any time on demand of the lender. It includes any loan with an indefinite maturity and any loan if the benefits of the interest arrangements of such loans are not transferable and are conditioned on the future performance of substantial service by an individual. Sec. {(7872(e)}.

The AFR for demand loans is the short term AFR. The demand loan becomes a below market loan if the interest payable on the loan is at a rate less than the applicable AFR. Sec. {7872(e)}.

The amounts of the loan are treated as transferred and re-transferred on a daily basis and the applicable Federal rate for any day is the relevant rate for the six month period in which such day falls. Tax Management Sec. 535 p. B-409.

A term loan is any loan that is not a demand loan. The applicable Federal rate is the rate for the day the loan is made and the relevant rate is determined by the reference to the term of the loan short-term, mid-term or long-term rate. Sec. {7872(e)}. A term loan becomes a below market loan if the amount loaned exceeds the present value of all payments under the loan, determined as of the day the loan is made, using a discount rate equal to the applicable Federal rate in effect on the day of the loan is made. Treas. Reg. {1.7872-3(a)(2)}.

Finally, the amount of loaned means the amount received by the borrower. 

For any questions or concerns, please feel free to contact the law office of Arlington Heights attorney Robert S. Thomas. 

LAW OFFICE OF ROBERT S THOMAS

1655 N Arlington Heights Rd, Suite 300West

Arlington Heights IL 60004

847-392-5893 phone
info@attorneyrobertthomas.com

Se Habla Español

Parentage Issues in Illinois

Parentage means a legal proceeding in which a child is born and the natural mother and natural father of that child have not married. This is also known as a child out of “wedlock.” The statute that governs parentage proceedings in Illinois is known as the Illinois Act of 1984 (750 Illinois Compiled Statutes (ILCS) 40/1 et seq.)

Because the mother and father have never been married, there are no property issues in a parentage proceeding. The only issues in parentage are the rights and the obligations of both parents for the child they conceived.

Most of the issues in a parentage proceeding are governed by the provisions in the divorce statute that deal with the child (Illinois Marriage and Dissolution of Marriage Act 750 ILCS 5/101 et seq). Thus, in a parentage proceeding the obligations of the parents for their child are determined the same way as are the obligations of parents for their child in a divorce.

The following are the issues that must be settled in a parentage proceeding: 
1.       Residential custody means which parent the child will live with on a daily basis; 
2.       Joint vs. sole custody - joint custody simply means both the mother and father will jointly discuss and jointly decide all major issues involving their child. Sole custody means the parent with whom the child lives (residential custody) will unilaterally make all of the decisions for issues affecting the child. The issues of residential custody and joint sole custody in parentage are governed by the divorce statute in 750 ILCS 5/602 – 5/602.1. 
3.       Child support - the parent that has residential custody of the child receives child support payments from the parent that does not have residential custody. The parent making the child support payments is known as the “obligor” and the parent receiving the child support payments is known as the “obligee.” The child support payments in parentage are governed by the child support provisions in the divorce statute sections found in 750 ILCS 5/505. 
4.       Visitation – the visitation schedule between the minor child and the parent that does not have custody is governed by the divorce statute in 750 ILCS 5/607. 
5.       Removal means whether the parent having residential custody can move to another state with the minor child. This issue is governed under 750 ILCS 5/609, which is in the divorce statute. 
6.        In addition to child support payment obligations, the obligor is also responsible for paying for before school care/after school care/day care expenses as well as costs of the extracurricular activities of the minor child. The obligee is also responsible for a portion of these costs, which is generally shared equally between the obligor and obligee. 
7.       Medical insurance – one parent must provide medical insurance for the minor child and both parents will share in the cost of the minor child’s medical premium costs, co-payments, and uncovered medical expenses. Medical insurance is governed by the divorce statute sections 750 ILCS 5/505 and 5/505.2. 
8.       Dependency exemption - a parent can claim the child as a tax deduction. Generally, if both parents are employed, the parents will alternate years. The dependency exemption is governed by Section 152 of the Internal Revenue Code.

These are the primary issues that the parties must settle in a parentage proceeding, if the parties cannot settle all of the issues, then the judge will decide those issues on which the parties cannot agree.   

For any questions or concerns, please feel free to contact the law office of Arlington Heights attorney Robert S. Thomas. 

LAW OFFICE OF ROBERT S THOMAS

1655 N Arlington Heights Rd, Suite 300West

Arlington Heights IL 60004

847-392-5893 phone
info@attorneyrobertthomas.com

Se Habla Español

Discharge (or Cancellation) of Debt (Part 2 of 4)

Discharge (or Cancellation) of Debt (Part 2 of 4)

What is a Qualified Principal Residence?

Arlington Heights Lawyer, Robert S. Thomas explains the Mortgage Debt Forgiveness Act looks to IRC § 121 for the definition of a Principal Residence as:

1. The property must have been both “owned and used” as the taxpayer’s principal residence for periods aggregating 2 or more years.  Treas. Reg. § 1.121 -1(a);

2.  The principal residence does not have to be located in the United States. Treas. Reg. § 1.121-1;

3.  If the taxpayer alternates between two properties, the primary residence will be the property used a majority of the time during the year. Treas. Reg. §1/121-1(b)(2).

4. During any five year period, a taxpayer can have more than one principal residence if each residence has been the taxpayer’s principal residence for two years. Treas. Reg. §1.121 -1(b)(4).

5. “Owned and used” can be satisfied by showing ownership and usage for twenty-four full months, or 730 days, either concurrently or for non-concurrent periods, if both usage and ownership exist for 730 days ending on the date of the “identifiable event.” Treas. Reg. §1.121–1(c)(2)(i). Seasonal absences when coupled with rental of the property are counted toward occupancy but each case depends on the facts and circumstances of that case. Id.

6.  Relevant factors, but not limited to the following factors, in determining a taxpayer’s principal residence, are: (1) taxpayer’s place of employment; (2) principal abode; (3) address used on tax return; (4) address on driver’s license, car registration, or voter registration; (5) location of church and recreational clubs or activities to which the taxpayer is affiliated. Treas. Reg. §1/121-1(b)(2).

7.  Property that may be used as a principal residence may include a detached family residence, a houseboat, house trailer, condominium, or cooperative. Treas. Reg. § 1.121-1(b)(1).

8.  In transfers of property between spouses in a divorce, the period the transferor spouse owned the property is included in the period that the transferee spouse owned the property.  However, the period that the transferor spouse used the property is not included in the period the transferee spouse used the property. Treas. Reg. § 1.121.-4(b)(2).

For any questions or concerns, please feel free to contact the law office of Arlington Heights attorney Robert S. Thomas.  To read Discharge of Debt part one, three or four click on each link.

Discharge (or Cancellation) of Debt (Part 1 of 4)

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Discharge (or Cancellation) of Debt (Part 1 of 4)

Arlington Heights bankruptcy attorney explains that when a borrower receives money in a loan transaction and the borrower does not pay the debt, the borrower’s wealth is deemed to have increased. 

This is known as “Discharge of Debt” or “Cancellation of Debt.” Because a “Discharge of Debt” increases the debtor’s wealth, the Internal Revenue Code (IRC) § 61 (a)(12) specifically includes this as gross income of the taxpayer.

However, IRC §108 provides five exceptions to § 61 (a)(12), under which a taxpayer may be excused from recognizing the discharge as gross income. We will only be addressing exception #1 in this newsletter; the remaining 4 will be addressed in the newsletter entitled, “Discharge of Debt, Part 4 of 4.

1.  Discharge of Qualified Principal Residence.  Under the Mortgage Debt Forgiveness Relief Act of 2007, a taxpayer may exclude from gross income and thus Federal income tax, the amount of mortgage debt that is reduced through short sales, mortgage modifications, and foreclosure.

            In order to qualify for the exclusion from Federal income taxes under the Mortgage Debt Forgiveness Relief Act of 2007, the following conditions must be met:

1. The debt (that is forgiven, discharged, or cancelled) must only be from commercial lenders loaned between January 1, 2007 and December 21, 2013 for qualified principal residences;

2. Up to $2 million of debt is eligible, or up to $1 million of debt if married and filing separately;

3. The debt forgiven only applies if derived from the short sale, mortgage modification, and/or foreclosure of a qualified principal residence;

4. The debt forgiven is for the first and/or second mortgage of a qualified principal residence;

5.  The taxpayer must file IRS Form 982 with the taxpayer’s tax returns, which states the amount of debt forgiven and it must be done in the tax year the debt is forgiven (VERY IMPORTANT!);

6.  The Act only applies to the “qualified principal residence.” This is a house that the taxpayer has owned and used as the taxpayer’s principal residence for a period of two or more years ending on the “identifiable event,” which means the event that determines when the debt was cancelled, reduced or forgiven, and the nature and timing of this event of each case.

For any questions or concerns, please feel free to contact the law office of Arlington Heights attorney Robert S. Thomas.  To read Discharge of Debt part two, three or four click on each link.