Title 26 — Internal Revenue CodeRelease 119-73
§1274 Determination of issue price in the case of certain debt instruments issued for property
Title 26 › Subtitle Subtitle A— - Income Taxes › Chapter CHAPTER 1— - NORMAL TAXES AND SURTAXES › Subchapter Subchapter P— - Capital Gains and Losses › Part PART V— - SPECIAL RULES FOR BONDS AND OTHER DEBT INSTRUMENTS › Subpart Subpart A— - Original Issue Discount › § 1274
Summary
Explains how to figure the issue price when someone takes a debt instrument as payment for property. If the loan has enough stated interest, use the stated principal. If not, use the "imputed principal," which is the total present value of all payments, figured as of the sale date and discounted using the federal interest rate that is compounded semiannually. If the stated redemption at maturity is more than the stated or imputed principal and some payments are due more than 6 months after the sale, this rule applies. The imputed principal can be adjusted in abusive cases (for example, tax shelters, recent sales patterns, nonrecourse financing, or loans longer than the property's economic life) to equal the property's fair market value. The law sets which federal rate to use by loan term: short (not over 3 years), mid (over 3 but not over 9 years), or long (over 9 years). The Treasury sets those rates monthly and will use the lowest rate from the three-month window that ends when a written binding contract exists. The Treasury can allow a lower rate if a taxpayer proves it matches the same principles. If the seller (or a related person) keeps leasing part of the property after the sale under a plan, the discount rate is 110% of the applicable federal rate, and a different rule (section 1274A) does not apply. Exceptions include certain farm sales under $1,000,000, sale of a principal residence, very small deals under $250,000, some patent sales, and other listed special cases.
Full Legal Text
Title 26, §1274
Internal Revenue Code — Source: USLM XML via OLRC
(a)In the case of any debt instrument to which this section applies, for purposes of this subpart, the issue price shall be—
(1)where there is adequate stated interest, the stated principal amount, or
(2)in any other case, the imputed principal amount.
(b)For purposes of this section—
(1)Except as provided in paragraph (3), the imputed principal amount of any debt instrument shall be equal to the sum of the present values of all payments due under such debt instrument.
(2)For purposes of paragraph (1), the present value of a payment shall be determined in the manner provided by regulations prescribed by the Secretary—
(A)as of the date of the sale or exchange, and
(B)by using a discount rate equal to the applicable Federal rate, compounded semiannually.
(3)(A)In the case of any potentially abusive situation, the imputed principal amount of any debt instrument received in exchange for property shall be the fair market value of such property adjusted to take into account other consideration involved in the transaction.
(B)For purposes of subparagraph (A), the term “potentially abusive situation” means—
(i)a tax shelter (as defined in section 6662(d)(2)(C)(ii)), and
(ii)any other situation which, by reason of—
(I)recent sales transactions,
(II)nonrecourse financing,
(III)financing with a term in excess of the economic life of the property, or
(IV)other circumstances,
(c)(1)Except as otherwise provided in this subsection, this section shall apply to any debt instrument given in consideration for the sale or exchange of property if—
(A)the stated redemption price at maturity for such debt instrument exceeds—
(i)where there is adequate stated interest, the stated principal amount, or
(ii)in any other case, the imputed principal amount of such debt instrument determined under subsection (b), and
(B)some or all of the payments due under such debt instrument are due more than 6 months after the date of such sale or exchange.
(2)For purposes of this section, there is adequate stated interest with respect to any debt instrument if the stated principal amount for such debt instrument is less than or equal to the imputed principal amount of such debt instrument determined under subsection (b).
(3)This section shall not apply to—
(A)(i)Any debt instrument arising from the sale or exchange of a farm (within the meaning of section 6420(c)(2))—
(I)by an individual, estate, or testamentary trust,
(II)by a corporation which as of the date of the sale or exchange is a small business corporation (as defined in section 1244(c)(3)), or
(III)by a partnership which as of the date of the sale or exchange meets requirements similar to those of section 1244(c)(3).
(ii)Clause (i) shall apply only if it can be determined at the time of the sale or exchange that the sales price cannot exceed $1,000,000. For purposes of the preceding sentence, all sales and exchanges which are part of the same transaction (or a series of related transactions) shall be treated as 1 sale or exchange.
(B)Any debt instrument arising from the sale or exchange by an individual of his principal residence (within the meaning of section 121).
(C)(i)Any debt instrument arising from the sale or exchange of property if the sum of the following amounts does not exceed $250,000:
(I)the aggregate amount of the payments due under such debt instrument and all other debt instruments received as consideration for the sale or exchange, and
(II)the aggregate amount of any other consideration to be received for the sale or exchange.
(ii)For purposes of clause (i), any consideration (other than a debt instrument) shall be taken into account at its fair market value.
(iii)For purposes of this subparagraph, all sales and exchanges which are part of the same transaction (or a series of related transactions) shall be treated as 1 sale or exchange.
(D)Any debt instrument to which section 1273(b)(3) applies.
(E)In the case of any transfer described in section 1235(a) (relating to sale or exchange of patents), any amount contingent on the productivity, use, or disposition of the property transferred.
(F)Any debt instrument to the extent section 483(e) (relating to certain land transfers between related persons) applies to such instrument.
(4)If any person—
(A)in connection with the sale or exchange of property, assumes any debt instrument, or
(B)acquires any property subject to any debt instrument,
(d)For purposes of this section—
(1)(A)In the case of a debt instrument with a term of:The applicable Federal rate is: Not over 3 yearsThe Federal short-term rate. Over 3 years but not over 9 yearsThe Federal mid-term rate. Over 9 yearsThe Federal long-term rate.
(B)During each calendar month, the Secretary shall determine the Federal short-term rate, mid-term rate, and long-term rate which shall apply during the following calendar month.
(C)For purposes of this paragraph—
(i)The Federal short-term rate shall be the rate determined by the Secretary based on the average market yield (during any 1-month period selected by the Secretary and ending in the calendar month in which the determination is made) on outstanding marketable obligations of the United States with remaining periods to maturity of 3 years or less.
(ii)The Federal mid-term and long-term rate shall be determined in accordance with the principles of clause (i).
(D)The Secretary may by regulations permit a rate to be used with respect to any debt instrument which is lower than the applicable Federal rate if the taxpayer establishes to the satisfaction of the Secretary that such lower rate is based on the same principles as the applicable Federal rate and is appropriate for the term of such instrument.
(2)(A)In the case of any sale or exchange, the applicable Federal rate shall be the lowest 3-month rate.
(B)For purposes of subparagraph (A), the term “lowest 3-month rate” means the lowest of the applicable Federal rates in effect for any month in the 3-calendar-month period ending with the 1st calendar month in which there is a binding contract in writing for such sale or exchange.
(3)In determining the term of a debt instrument for purposes of this subsection, under regulations prescribed by the Secretary, there shall be taken into account options to renew or extend.
(e)(1)In the case of any debt instrument to which this subsection applies, the discount rate used under subsection (b)(2)(B) or section 483(b) shall be 110 percent of the applicable Federal rate, compounded semiannually.
(2)section 1274A shall not apply to any debt instrument to which this subsection applies.
(3)This subsection shall apply to any debt instrument given in consideration for the sale or exchange of any property if, pursuant to a plan, the transferor or any related person leases a portion of such property after such sale or exchange.
Legislative History
Notes & Related Subsidiaries
Editorial Notes
Amendments
2018—Subsec. (b)(3)(B)(i). Pub. L. 115–141 substituted “section 6662(d)(2)(C)(ii)” for “section 6662(d)(2)(C)(iii)”. 1997—Subsec. (c)(3)(B). Pub. L. 105–34 substituted “section 121” for “section 1034”. 1996—Subsec. (b)(3)(B)(i). Pub. L. 104–188 substituted “section 6662(d)(2)(C)(iii)” for “section 6662(d)(2)(C)(ii)”. 1989—Subsec. (b)(3)(B)(i). Pub. L. 101–239 substituted “section 6662(d)(2)(C)(ii)” for “section 6661(b)(2)(C)(ii)”. 1986—Subsec. (c)(3)(A). Pub. L. 99–514 substituted “for $1,000,000 or less” for “for less than $1,000,000” in heading of subsec. (c)(4)(A) as so designated prior to its redesignation as subsec. (c)(3)(A) by Pub. L. 99–121, § 101(a)(1)(D), see 1985 Amendment note below. 1985—Subsec. (b)(2)(B). Pub. L. 99–121, § 101(a)(1)(A), struck out “120 percent of” after “rate equal to”. Subsec. (c)(1)(A)(ii). Pub. L. 99–121, § 101(a)(1)(B), amended cl. (ii) generally, substituting “the imputed principal amount of such debt instrument determined under subsection (b)” for “the testing amount”. Subsec. (c)(2). Pub. L. 99–121, § 101(a)(1)(C), substituted “the imputed principal amount of such debt instrument determined under subsection (b)” for “the testing amount”. Subsec. (c)(3). Pub. L. 99–121, § 101(a)(1)(D), redesignated par. (4) as (3). Former par. (3), defining “testing amount”, was struck out. Subsec. (c)(4). Pub. L. 99–121, § 102(b), added par. (4). Former par. (4) redesignated (3). Subsec. (d)(1)(B) to (D). Pub. L. 99–121, § 101(b)(1), amended subpars. (B) to (D) generally, in subpar. (B) substituting provisions setting a monthly schedule for the determination of Federal rates for provisions which had formerly set a semi-annual schedule for the determination of such rates, in subpar. (C) substituting provisions setting a monthly schedule for the determination of Federal short-term, mid-term, and long-term rates based on the average market yield during any 1-month period ending in the month in which the determination is made for former provisions which had directed that the Federal rate determined under subpar. (A) apply during the appropriate 6-month period, and in subpar. (D) substituting provisions allowing a lower rate in certain cases for provisions relating to the setting of the Federal rate for any 6-month period. Subsec. (d)(2). Pub. L. 99–121, § 101(b)(2), amended par. (2) generally. Prior to amendment, par. (2) read as follows: “In the case of any sale or exchange, the determination of the applicable Federal rate shall be made as of the first day on which there is a binding contract in writing for the sale or exchange.” Subsec. (e). Pub. L. 99–121, § 101(c), added subsec. (e).
Statutory Notes and Related Subsidiaries
Effective Date
of 1997 AmendmentAmendment by Pub. L. 105–34 applicable to sales and exchanges after May 6, 1997, with certain exceptions, see section 312(d) of Pub. L. 105–34, set out as a note under section 121 of this title.
Effective Date
of 1989 AmendmentAmendment by Pub. L. 101–239 applicable to returns the due date for which (determined without regard to extensions) is after Dec. 31, 1989, see section 7721(d) of Pub. L. 101–239, set out as a note under section 461 of this title.
Effective Date
of 1986 AmendmentAmendment by Pub. L. 99–514 effective, except as otherwise provided, as if included in the provisions of the Tax Reform Act of 1984, Pub. L. 98–369, div. A, to which such amendment relates, see section 1881 of Pub. L. 99–514, set out as a note under section 48 of this title.
Effective Date
of 1985 Amendment Pub. L. 99–121, title I, § 105(a), Oct. 11, 1985, 99 Stat. 510, as amended by Pub. L. 99–514, § 2, Oct. 22, 1986, 100 Stat. 2095, provided that: “(1) In general.—Except as provided in paragraph (2), the
Amendments
made by section 101 and 102 [enacting section 1274A and amending this section and section 280G and 483 of this title] shall apply to sales and exchanges after
June 30, 1985, in taxable years ending after such date. The amendment made by section 2 of Public Law 98–612 [amending section 44(b) of Pub. L. 98–369, set out as a note under section 1271 of this title] shall not apply to sales and exchanges after
June 30, 1985, in taxable years ending after such date. “(2) Regulatory authority to establish lower rate.—section 1274(d)(1)(D) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954], as added by section 101(b), shall apply as if included in the
Amendments
made by section 41 of the Tax Reform Act of 1984 [Pub. L. 98–369, see
Effective Date
note set out under section 1271 of this title].”
Effective Date
Section applicable to taxable years ending after July 18, 1984, and applicable to sales or exchanges after Dec. 31, 1984, but not applicable to any sale or exchange pursuant to a written contract which was binding on Mar. 1, 1984, and at all times thereafter before the sale or exchange, see section 44 of Pub. L. 98–369, set out as a note under section 1271 of this title. Plan
Amendments
Not Required Until January 1, 1989For provisions directing that if any
Amendments
made by subtitle A or subtitle C of title XI [§§ 1101–1147 and 1171–1177] or title XVIII [§§ 1800–1899A] of Pub. L. 99–514 require an amendment to any plan, such plan amendment shall not be required to be made before the first plan year beginning on or after Jan. 1, 1989, see section 1140 of Pub. L. 99–514, as amended, set out as a note under section 401 of this title. Transitional Rule for Purposes of Imputed Interest RulesProvisions respecting treatment of debt instruments received in exchange for property, relating to special rules for sales after Dec. 31, 1984, and before July 1, 1985, general rule for assumptions of loans, exception for assumptions of loans made on or before Oct. 15, 1984, and exception for assumptions of loans with respect to certain property, see section 44(b)(4)–(7) of Pub. L. 98–369, as amended, set out as an
Effective Date
note under section 1271 of this title.
Reference
Citations & Metadata
Citation
26 U.S.C. § 1274
Title 26 — Internal Revenue Code
Last Updated
Apr 6, 2026
Release point: 119-73