Most of us do this annually, an annual, renewable note.From article in context of family loans:
15 See Blattmachr and Madden, ‘‘How Low Can You Go?’’ 109 J. of Tax’n 22 (2008), discussing the tax treatment when this oc- curs. For a contrary view see Hayes, ‘‘Adventures in Forgiveness and Forgetfulness: Intra-Family Loans for Beginners,’’ 13 Califor- nia Trusts and Estates Quarterly No. 2, 5 (2007). The complete analysis provided under the article by Philip J. Hayes is as fol- lows:
One factor indicating that a loan lacks bona fides is the exchange, during periods of falling interest rates, of a note for a new note with the same principal amount but bearing a lower interest rate. Some practitioners are un- concerned with refinancing an intra-family loan to a lower rate if the loan allows prepayment (almost all do, or, if silent, state law permits). More cautious advisors recommend avoiding this practice (see, e.g., Benjamin Feder, The Promissory Note Problem, 142 Trusts and Estates 10 (January 2003)), however, based on the plain economic reality that a true lender would not trade one asset for another less valuable. To avoid the IRS argu- ment that the loan is actually a gift, these advisors rec- ommend renegotiating the terms of the note to compen- sate the lender for the lower interest rate; perhaps by paying down the principal amount, shortening the matu- rity date, or adding more attractive collateral. The IRS has provided no direct authority on this issue. The Pro- posed Regulations include a section entitled ‘‘Treatment of Renegotiations,’’ (Prop. Treas. Regs. §1.7872-11(e)) but merely reserves the subject for later guidance, which has not been forthcoming.
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Sec 1274(d)
(3) Term of debt instrument
In determining the term of a debt instrument for purposes of this subsection, under regulations prescribed by the Secretary, there shall be taken into account options to renew or extend.