In general, acquisition indebtedness does not include debt incurred
by a qualified organization in acquiring or improving any real
property. A qualified organization is:
- A qualified retirement plan under section 401(a),
- An educational organization described in section
170(b)(1)(A)(ii) and certain of its affiliated support organizations,
or
- A title-holding company described in section
501(c)(25).
This exception from acquisition indebtedness does not apply
in the following six situations:
- The acquisition price is not a fixed amount determined as of
the date of the acquisition or the completion of the improvement.
However, the terms of a sales contract may provide for price
adjustments due to customary closing adjustments such as prorating
property taxes. The contract also may provide for a price adjustment
if it is for a fixed amount dependent upon subsequent resolution of
limited, external contingencies such as zoning approvals, title
clearances, and the removal of easements. These conditions in the
contract will not cause the price to be treated as an undetermined
amount. (But see Note 1 at the end of this list.)
- Any debt or other amount payable for the debt, or the time
for making any payment, depends, in whole or in part, upon any
revenue, income, or profits derived from the real property. See
Note 1 at the end of this list also.
- The real property is leased back to the seller of the
property or to a person related to the seller as described in section
267(b) or section 707(b). (But see Note 2 at the end of
this list also.)
- The real property is acquired by a qualified retirement plan
from, or after its acquisition is leased by a qualified retirement
plan to, a related person. (But see Note 2 at the end of
this list.) For this purpose, a related person is:
- An employer who has employees covered by the plan,
- An owner with at least a 50% interest in an employer
described in (a),
- A member of the family of any individual described in (a) or
(b),
- A corporation, partnership, trust, or estate in which a
person described in (a), (b), or (c) has at least a 50% interest,
or
- An officer, director, 10% or more shareholder, or highly
compensated employee of a person described in (a), (b), or (d).
- The seller, a person related to the seller (under section
267(b) or section 707(b)), or a person related to a qualified
retirement plan (as described in (4)) provides financing for the
transaction on other than commercially reasonable terms.
- The real property is held by a partnership in which an
exempt organization is a partner (along with taxable entities), and
the principal purpose of any allocation to an exempt organization is
to avoid tax. This generally applies to property placed in service
after 1986. For more information, see section 514(c)(9)(B)(vi) and
section 514(c)(9)(E).
Note 1:
Qualifying sales by financial institutions of foreclosure property
or certain conservatorship or receivership property are not included
in (1) or (2) and, therefore, do not give rise to acquisition
indebtedness. For more information, see section 514(c)(9)(H).
Note 2:
For purposes of (3) and (4), small leases are disregarded. A small
lease is one that covers no more than 25% of the leasable floor space
in the property and has commercially reasonable terms.
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