The fair market value of the notes can be a sneaky tax deduction
Looking for tax deductions
Notes and mortgage notes have two main values: cost value and fair market value. The cost value is what you paid, or what you invested; The fair market value is what the note is worth today if it were sold. If $10,000.00 was originally invested in a note, and today its fair market value is zero ($0.00), a tax deduction of $10,000.00 may be available, depending on the specific facts. This tax deduction will happen as long as you take steps to make it happen. The burden is on you.
The promissory note and mortgage note can be held in a self-directed IRA, Roth IRA, estate account, or in a trust account. The note may have been a business note or a note from a friend or family member. It may be in a safe. The note may have lost value or may be worthless; you may qualify for a tax deduction. Since most taxpayers file tax returns at the end of the year; Now is the time to look for these “stealth tax deductions.” The burden falls on you.
What is the reason for the tax deduction?
US Treasury Regulations (IRS) require notes to be valued at their FAIR MARKET VALUE, not cost.
Dry. 20.2031-4 Valuation of notes
The fair market value of the notes, secured or unsecured, is presumed to be the amount of the unpaid principal, plus interest increased through the date of death, unless the executor establishes that the value is less or that the notes have no worth. However, the items of interest will be reported separately on the wealth tax return. If not repaid at face value, plus interest, satisfactory evidence must be presented that the note is worth less than the unpaid amount (due to interest rate, maturity date, or otherwise), or that the note is uncollectible, either in whole or in part (due to the insolvency of the party or obligors, or for any other cause), and that the assets pledged or mortgaged as collateral cannot satisfy the obligation.
Who should do the fair market value appraisal?
To determine the fair market value of a private party note or mortgage note, an appraisal or appraisal report must be prepared by a qualified and experienced appraiser.
Qualified Appraiser Definition: A qualified appraiser has obtained an appraiser designation from a recognized professional organization or has met the minimum education and experience requirements under IRS standards; periodically evaluate compensation; and meets any other requirements prescribed by the IRS (Code Sec. 170(f)(11)(E)(ii)). A person will not be considered a qualified appraiser for any appraisal unless they demonstrate verifiable education and experience in appraisal of the type of property subject to the appraisal, and have not been barred from practicing before the IRS at any time during the three-year period. ending on the date of the appraisal (Code Sec. 170(f)(11)(E)(iii)).
What factors affect fair market value?
• Collateral: no collateral, no collateral, or very little collateral
• Credit score information, financial and employment information for the borrower
• Credit ratings, financial information and employment information are negative
• Lender’s title insurance policy – not having it
• Written payment history schedule: not having it
• Bad payment history
• Interest rate too low
• Loan duration too long
• Payment amount too small or too infrequent
Individually and collectively, these encumbrances and deficiencies reduce the fair market value of a note. An independent third party purchaser will significantly discount the purchase price of the note to compensate for any and all of these deficiencies.
Resume
– Depending on individual facts, discounts applied can range from 5% to 90%.
– Any discount may contribute to tax savings and fee savings.
– Always consult and work with an experienced tax expert and promissory note expert.