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

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Removal of a Minor Child from the State of Illinois

Whether in a divorce proceeding or in a parentage action, the parent with whom the child resides on a daily basis (residential custody) may want to move to another state. Under Illinois law 750 ILCS (Illinois Compiled Statutes) 5/609, a party having residential custody of the minor children must obtain permission of the court to move to another state.

If the custodial parent wants to move within the state of Illinois, that parent does not have to seek court permission to move. If the custodial parent moves to another location within Illinois, then the other parent (non-custodial) parent will have to go to court and obtain a new visitation schedule if a custodial parent has moved a long distance making the existing visitation schedule not appropriate.

There are two major Illinois Supreme Court decisions that define the current law in Illinois on the issue of removal: In Re Marriage of Echert, 518 N.E.2d 1041 (1988) and In Re Marriage of Collingbourne, 791 N.E.2d 532 (2003).

The primary issue that courts are trying to decide in removal cases is whether the contemplated move by the custodial parent is in the best interest of the child

The primary factors that courts consider in deciding whether to grant the request to remove the child to another state are as follows:

1. The likelihood that the proposed move will enhance the quality of life for both the parent and child;
2. The motives of the noncustodial parent in resisting removal;
3. The existing visitation schedule between the noncustodial parent and the minor child; and
4. Whether the visitation schedule can be reached if removal is allowed that will foster the relationship between the minor child and the noncustodial parent.

The decision by the court is not limited to those facts.

The burden of proving that removal is in the best interests of the child is on the parent seeking removal.

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

United States Bankruptcy Laws

As a bankruptcy attorney, I know there are a lot of questions about bankruptcy, I hope this blog will answer your questions. 

The Bankruptcy laws are found in the U.S. Bankruptcy Code which is Title 11 of the United States Code (USC)

Article 1, Section 8 of the United States Constitution empowers Congress to enact uniform laws on Bankruptcy. Under this grant of authority Congress passed the Bankruptcy Act of 1898, which was amended later by the Chandler Act of 1938. The 1898 Act established the bankruptcy court systems. The 1978 Bankruptcy Reform Act repealed the Bankruptcy Act of 1898 and the 1978 Act created the Bankruptcy Code. In 1986 the Bankruptcy Code was amended to add the bankruptcy trustee system to undertake the administrative responsibilities of the Federal Bankruptcy courts. In addition the 1986 amendments added Chapter 12 to the Bankruptcy Code, which deals with bankruptcies for family farmers. The Bankruptcy Reform Act of 1994 made substantial changes in the ways mortgages are handled in the bankruptcy system. The Bankruptcy Abuse, Prevention and Consumer Protection Act of 2005 established the “means tests” or thresholds that determine whether debtors qualify for a Chapter 7 Bankruptcy or whether debtors are required to pursue a Chapter 13 Bankruptcy. In addition, the 2005 Act extended Chapter 12 protections to family fishermen and enacted Chapter 15 to deal with international bankruptcies.

Title 11 of the United States Code contains the following Chapters:

       1.     Chapters 1, 3 and 5 are the administrative rules for bankruptcy cases.

       2.     Chapter 7 is the liquidation provisions of the bankruptcy code. Chapter 7 Bankruptcy is sometimes referred to as a “straight bankruptcy” or “liquidation.” It is called a Chapter 7 Bankruptcy because the laws and procedures governing this type of bankruptcy are found in Chapter 7 of Title 11 of the U.S. Code. A Chapter 7 Bankruptcy takes approximately five months to complete and in the end debtors’ “unsecured debts,” or credit card and medical bills are discharged which means the debtor no longer has a legal obligation to pay for those debts.

       3.     Chapter 9 involves bankruptcies for municipal governments.

       4.     Chapter 11 is for commercial debtors that desire to continue to operate a business and to repay creditors concurrently through an acceptable plan of reorganization.

       5.     Chapter 12 is for family farmers and family fishermen.

       6.     Chapter 13 provides the method by which an individual with regular income may repay all or a portion of the debts over a period of 36 – 60 months. It is called a Chapter 13 Bankruptcy because the laws are detailed in Chapter 13 of Title 11 of the United States Code (USC). The debtor’s payments are made under the supervision of the bankruptcy trustee. When the payment plan of the 36 – 60 months is completed, the balance of the unsecured debts are discharged.

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