Real Property Debts of Qualified Organizations

In general, acquisition indebtedness does not include debt incurred by a qualified organization in acquiring or improving any real property. A qualified organization is:

1. A qualified retirement plan under section 401(a),
2. An educational organization described in section 170(b)(1)(A)(ii) and certain of its affiliated support organizations, or
3. A title-holding company described in section 501(c)(25).

This exception from acquisition indebtedness does not apply in the following six situations:

1. The acquisition price is not a fixed amount determined as of the date of the acquisition or the completion of the improvement. However, the terms of a sales contract may provide for price adjustments due to customary closing adjustments such as prorating property taxes. The contract also may provide for a price adjustment if it is for a fixed amount dependent upon subsequent resolution of limited, external contingencies such as zoning approvals, title clearances, and the removal of easements. These conditions in the contract will not cause the price to be treated as an undetermined amount. (But see Note 1 at the end of this list.)
2. Any debt or other amount payable for the debt, or the time for making any payment, depends, in whole or in part, upon any revenue, income, or profits derived from the real property. See Note 1 at the end of this list also.
3. The real property is leased back to the seller of the property or to a person related to the seller as described in section 267(b) or section 707(b). (But see Note 2 at the end of this list also.)
4. The real property is acquired by a qualified retirement plan from, or after its acquisition is leased by a qualified retirement plan to, a related person. (But see Note 2 at the end of this list.) For this purpose, a related person is:
1. An employer who has employees covered by the plan,
2. An owner with at least a 50% interest in an employer described in (a),
3. A member of the family of any individual described in (a) or (b),
4. A corporation, partnership, trust, or estate in which a person described in (a), (b), or (c) has at least a 50% interest, or
5. An officer, director, 10% or more shareholder, or highly compensated employee of a person described in (a), (b), or (d).
5. The seller, a person related to the seller (under section 267(b) or section 707(b)), or a person related to a qualified retirement plan (as described in (4)) provides financing for the transaction on other than commercially reasonable terms.
6. The real property is held by a partnership in which an exempt organization is a partner (along with taxable entities), and the principal purpose of any allocation to an exempt organization is to avoid tax. This generally applies to property placed in service after 1986. For more information, see section 514(c)(9)(B)(vi) and section 514(c)(9)(E).

Note 1: Qualifying sales by financial institutions of foreclosure property or certain conservatorship or receivership property are not included in (1) or (2) and, therefore, do not give rise to acquisition indebtedness. For more information, see section 514(c)(9)(H).

Note 2: For purposes of (3) and (4), small leases are disregarded. A small lease is one that covers no more than 25% of the leasable floor space in the property and has commercially reasonable terms.

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