Distribution and Valuation of Promissory Note

[Randy Watson]

A plan sold a piece of real estate and received cash and promissory note in exchange. The plan is now terminating and the sole participant will roll the vast majority of the benefit into an IRA. The participant will also be assigned the plan's interest and rights in the promissory note. How is the value of that interest in the note determined for reporting and income tax purposes? Is it simply the amount of the outstanding principal and interest owed on the note? Should the value be something less than that since a default is always a possibility and there's no guarantee that the participant will receive the full amount?

[Bird]

The value of a note depends on several factors, including the outstanding principal, interest rate, current market interest rates, likelihood of default, and the value of any property securing the note. It's possible that the true value could be less than the outstanding principal due to the risk of default, but if the rate is high to reflect that possibility, then not necessarily. In theory, the note was valued fairly at its inception, so any deviation from the current outstanding balance should be a reflection of changes in circumstances since that time - market rates rising or falling will inversely affect the note's value, as will a change in the likelihood of default.

Ultimately, the best way to get something that you can really hang your hat on is with an appraisal.

[Randy Watson]

The value of a note depends on several factors, including the outstanding principal, interest rate, current market interest rates, likelihood of default, and the value of any property securing the note. It's possible that the true value could be less than the outstanding principal due to the risk of default, but if the rate is high to reflect that possibility, then not necessarily. In theory, the note was valued fairly at its inception, so any deviation from the current outstanding balance should be a reflection of changes in circumstances since that time - market rates rising or falling will inversely affect the note's value, as will a change in the likelihood of default.

Ultimately, the best way to get something that you can really hang your hat on is with an appraisal.

Good answer! Thank you.