Property Acquired by Gift, Bequest, or Devise

If property subject to a mortgage is acquired by an organization by bequest or devise, the outstanding principal debt secured by the mortgage is not treated as acquisition indebtedness during the 10-year period following the date the organization receives the property.

If an organization receives a gift of property subject to a mortgage, the outstanding principal debt secured by the mortgage is not treated as acquisition indebtedness during the 10-year period following the date the organization receives the gift, as long as:

1. The mortgage was placed on the property more than 5 years before the date of the gift, and
2. The donor held the property for more than 5 years before the date of the gift.

For these purposes, the date of the gift is the date the organization receives the property.

These exceptions do not apply if an organization assumes and agrees to pay all or part of the debt secured by the mortgage or makes any payment for the equity in the property owned by the donor or decedent (other than an annuity payment excluded from the definition of acquisition indebtedness, discussed later under Annuity Obligation).

Whether an organization has assumed and agreed to pay all or part of a debt in order to acquire the property is determined by the facts and circumstances of each situation.

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