Installment Obligation Used as Security (Pledge Rule)
If you use an installment obligation to secure any debt, the net proceeds from the debt may be treated as a payment on the installment obligation. This is known as the pledge rule, and it applies if the selling price of the property is over $150,000. It doesn’t apply to the following dispositions.
• Sales of property used or produced in farming.
• Sales of personal-use property.
• Qualifying sales of timeshares and residential lots.
The net debt proceeds are the gross debt minus the direct expenses of getting the debt. The amount treated as a payment is considered received on the later of the following dates.
• The date the debt becomes secured.
• The date you receive the debt proceeds.
A debt is secured by an installment obligation to the extent that payment of principal or interest on the debt is directly secured (under the terms of the loan or any underlying arrangement) by any interest in the installment obligation.
For sales after December 16, 1999, payment on a debt is treated as directly secured by an interest in an installment obligation to the extent an arrangement allows you to satisfy all or part of the debt with the installment obligation.
Limit. The net debt proceeds treated as a payment on the pledged installment obligation can’t be more than the excess of item (1) over item (2) below.
1. The total contract price on the installment sale.
2. Any payments received on the installment obligation before the date the net debt proceeds are treated as a payment
See Publication 537 at www.IRS.gov for more information