(i) Facts. A sells property to B for $1,000,000 in a transaction that is not a potentially abusive situation (within the meaning of § 1.1274-3). In consideration for the property, B gives A $300,000 and issues a 5-year debt instrument that has a stated principal amount of $700,000, payable at maturity, and that calls for semiannual payments of interest at a rate of 8.5 percent. In addition to the cash downpayment, B pays A $14,000 designated as points on the loan. Assume that the points are not deductible under section 461(g)(2).
As taken form Treas Rule 1.1273-2(f) all debt requires property as collateral for the debt and should the property depreciate a new value will be established through the market plus any earnings or interest earned by the property or asset.
If and should the property make zero interest due to default or negative earnings due too interest owed after earnings then the property will have a market value of zero based on the issuers calculation of the fair market value of the mentioned property or asset.
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