Publication 598 |
2001 Tax Year |
Modifying Existing Debt
Extending, renewing, or refinancing an existing debt is considered
to be a continuation of that debt to the extent its outstanding
principal does not increase. When the principal of the modified debt
is more than the outstanding principal of the old debt, the excess is
treated as a separate debt.
Extension or renewal.
In general, any modification or substitution of the terms of a debt
by an organization is considered an extension or renewal of the
original debt, rather than the start of a new one, to the extent that
the outstanding principal of the debt does not increase.
The following are examples of acts resulting in the extension or
renewal of a debt:
- Substituting liens to secure the debt,
- Substituting obligees whether or not with the organization's
consent,
- Renewing, extending, or accelerating the payment terms of
the debt, and
- Adding, deleting, or substituting sureties or other primary
or secondary obligors.
Debt increase.
If the outstanding principal of a modified debt is more than that
of the unmodified debt, and only part of the refinanced debt is
acquisition indebtedness, the payments on the refinanced debt must be
allocated between the old debt and the excess.
Example.
An organization has an outstanding principal debt of $500,000 that
is treated as acquisition indebtedness. The organization borrows
another $100,000, which is not acquisition indebtedness, from the same
lender, resulting in a $600,000 note for the total obligation. A
payment of $60,000 on the total obligation would reduce the
acquisition indebtedness by $50,000 ($60,000 X $500,000/$600,000)
and the excess debt by $10,000.
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