[Code of Federal Regulations]
[Title 26, Volume 6]
[Revised as of April 1, 2002]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.483-3]

[Page 618-619]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
DEFERRED COMPENSATION, ETC.--Table of Contents
 
Sec. 1.483-3  Test rate of interest applicable to a contract.

    (a) General rule. For purposes of section 483, the test rate of 
interest for a contract is the same as the test rate that would apply 
under Sec. 1.1274-4 if the contract were a debt instrument. Paragraph 
(b) of this section, however, provides for a lower test rate in the case 
of certain sales or exchanges of land between related individuals.
    (b) Lower rate for certain sales or exchanges of land between 
related individuals--(1) Test rate. In the case of a qualified sale or 
exchange of land between related individuals (described in section 
483(e)), the test rate is not greater than 6 percent, compounded 
semiannually, or an equivalent rate based on an appropriate compounding 
period.
    (2) Special rules. The following rules and definitions apply in 
determining whether a sale or exchange is a qualified sale under section 
483(e):
    (i) Definition of family members. The members of an individual's 
family are determined as of the date of the sale or exchange. The 
members of an individual's family include those individuals described in 
section 267(c)(4) and the spouses of those individuals. In addition, for 
purposes of section 267(c)(4), full effect is given to a legal adoption, 
ancestor means parents and grandparents, and lineal descendants means 
children and grandchildren.
    (ii) $500,000 limitation. Section 483(e) does not apply to the 
extent that the stated principal amount of the debt instrument issued in 
the sale or exchange, when added to the aggregate stated principal 
amount of any other debt instruments to which section 483(e) applies 
that were issued in prior qualified sales between the same two 
individuals during the same calendar year, exceeds $500,000. See Example 
3 of paragraph (b)(3) of this section.
    (iii) Other limitations. Section 483(e) does not apply if the 
parties to a contract include persons other than the related individuals 
and the parties enter into the contract with an intent to circumvent the 
purposes of section 483(e). In addition, if the property sold or 
exchanged includes any property other than land, section 483(e) applies 
only to the extent that the stated principal amount of the debt 
instrument issued in the sale or exchange is attributable to the land 
(based on the relative fair market values of the land and the other 
property).
    (3) Examples. The following examples illustrate the rules of this 
paragraph (b).

    Example 1. On January 1, 1995, A sells land to B, A's child, for 
$650,000. The contract for sale calls for B to make a $250,000 down 
payment and issue a debt instrument with a stated principal amount of 
$400,000. Because the stated principal amount of the debt instrument is 
less than $500,000, the sale is a qualified sale and section 483(e) 
applies to the debt instrument.
    Example 2. The facts are the same as in Example 1 of paragraph 
(b)(3) of this section, except that on June 1, 1995, A sells additional 
land to B under a contract that calls for B to issue a debt instrument 
with a stated principal amount of $100,000. The stated principal amount 
of this debt instrument ($100,000) when added to the stated principal 
amount of the prior debt instrument ($400,000) does not exceed $500,000. 
Thus, section 483(e) applies to both debt instruments.
    Example 3. The facts are the same as in Example 1 of paragraph 
(b)(3) of this section, except that on June 1, 1995, A sells additional 
land to B under a contract that calls for B to issue a debt instrument 
with a stated principal amount of $150,000. The stated principal amount 
of this debt instrument when added to the stated principal amount of the 
prior debt instrument ($400,000) exceeds $500,000. Thus, for purposes of 
section 483(e), the debt instrument issued in the sale of June 1, 1995, 
is treated as two separate debt instruments: a $100,000 debt instrument 
(to which section 483(e) applies) and a $50,000 debt instrument (to 
which section 1274, if otherwise applicable, applies).


[[Page 619]]


    (c) Effective date. This section applies to sales and exchanges that 
occur on or after April 4, 1994. Taxpayers, however, may rely on this 
section for sales and exchanges that occur after December 21, 1992, and 
before April 4, 1994.

[T.D. 8517, 59 FR 4807, Feb. 2, 1994]