Question regarding loan to relative

[IBWino]

About a year ago, we loaned $200K to my MIL so that she could purchase a home near us, with the understanding that she would pay us back as soon as she sold her existing home. Her previous residence has since sold, and she has returned the money to us. A friend recently mentioned that this could trigger an inquiry from the IRS, and that we should have documented the loan with some sort of loan agreement, including a minimum interest rate.

Does anyone here have any experience with a similar situation? I suppose we could generate an informal loan document, but with all that she has done for us in the past, we weren't planning to charge her any interest for such a short period.

Regards,
Wino

 

[brett]

My best guess is that you have a record of the money going out, and a record the exact same sum coming back from the same person.

A close relative to boot.

I cannot imagine that this would not pass the smell test with this agency should it even be necessary.

 

[Blue Collar Guy]

Yes there is a minimum interest rate, your friend is correct. She paid it back in a year so we arent talking big bucks. They have published rates for the loan lengths, But a 1 year loan would be about 1 %.
Wait for the IRS letter if it ever comes. Dont forget you could have made 28k a gift so the loan was only for 172k,

Here is the rate tables.https://www.irs.gov/pub/irs-drop/rr-17-15.pdf


Im certainly not an authority on this topic but I would lose no sleep over it.

 

[IBWino]

@brett,
Thanks for the response, that is certainly the way we feel about it.

@ Blue Collar Guy,
Thanks very much for the advice and link. I think we may do as you suggest and wait until we receive an inquiry/notice from the IRS. However, it seems to me that if she was required to pay us 1% interest, and we didn't declare any on our tax return, then we might be subject to some penalty. Is that correct?

 

[Senator]

@brett,
Thanks for the response, that is certainly the way we feel about it.

@ Blue Collar Guy,
Thanks very much for the advice and link. I think we may do as you suggest and wait until we receive an inquiry/notice from the IRS. However, it seems to me that if she was required to pay us 1% interest, and we didn't declare any on our tax return, then we might be subject to some penalty. Is that correct?

The IRS is unlikely to worry about, or even know about, 1% of $200K or $2,000. Many people make many times that and never declare it. Anyone in the trades probably does.

You took money out, and put it back. You could have put in a shoe box for the apocalypse. Or loaned it out. Or gambled it and won it back. Or rolled around in it on the bed for a few months.

 

[ivinsfan]

I dunno about the tax man, but you are a good son-in-law...

 

[IBWino]

The IRS is unlikely to worry about, or even know about, 1% of $200K or $2,000. Many people make many times that and never declare it. Anyone in the trades probably does.

You took money out, and put it back. You could have put in a shoe box for the apocalypse. Or loaned it out. Or gambled it and won it back. Or rolled around in it on the bed for a few months.

Yeah, you are probably right. My friend made me nervous when he told me that the IRS frowns on loaning money interest free, even to close relatives.

I dunno about the tax man, but you are a good son-in-law...

Thanks. She's a great mother-in-law. My FIL past away about 18 months ago, and it's been difficult for her (they were married 60 years). She's 81 years old and a bit frail. She previously lived about 45 minutes drive from us, but recently purchased the house next door. This has made life much easier for my wife (and me). We have her over for dinner a couple of times a week, and she feels much more content knowing we are so close.

Regards,
Wino

 

[pb4uski]

Don't worry about it.... you can deal with it if there is a need to and it is unlikely that there will ever be a need to.

 

[target2019]

Thanks. She's a great mother-in-law. My FIL past away about 18 months ago, and it's been difficult for her (they were married 60 years). She's 81 years old and a bit frail. She previously lived about 45 minutes drive from us, but recently purchased the house next door. This has made life much easier for my wife (and me). We have her over for dinner a couple of times a week, and she feels much more content knowing we are so close.

Nice story. You have peace of mind.
My hunch is that the IRS is not interested in the tax on 2% of $2,000 loaned for a short time.

Unless your family history has loan sharks in it!

 

[pb4uski]

I think you meant 2% of $200,000 loaned for a short time.

 

[Just_Steve]

Don't worry about the IRS but do hope there is no medicare look back in the next 5 years, there will be some explaining to do, best to have the loan documented.

 

[Sunset]

First off, the IRS won't even know since nothing is reported to them anywhere. This is not like bank interest, where the bank reports it, so taxpayers get caught for not claiming it.

Besides, any IRS agent would feel like a slimy heel wanting to pursue this, it would not be something to be proud about.

I once did something with a bank where I earned interest and should not have done the action (have to be vague here). The tax boys found out from the bank, and sent me a letter saying I owed $500 in taxes plus a fine. I appealed by writing back to them, explaining how I didn't know. How can we as taxpayers know all the hundred thousands of rules they have? and it was a one time thing.

They closed the case with no fine and no taxes.

 

[Souschef]

First off, the IRS won't even know since nothing is reported to them anywhere. This is not like bank interest, where the bank reports it, so taxpayers get caught for not claiming it.

Sorry, but that is not true. When she sold her house, there is a 1099S to report the sale.
Also, there is a thing called "imputed interest"
The tax code expects you to charge a certain amount of interest for a loan — and even if you don't, you can be taxed as if you did. The IRS refers to this as "imputed interest."

 

[Sunset]

Sorry, but that is not true. When she sold her house, there is a 1099S to report the sale.
Also, there is a thing called "imputed interest"
The tax code expects you to charge a certain amount of interest for a loan — and even if you don't, you can be taxed as if you did. The IRS refers to this as "imputed interest."

See, this is the crazy rules of taxes, so when I lend a work buddy $5.00 for lunch I should report this to the IRS so I can pay his "imputed interest" tax

1099S only wants to know the amount of the sale, who sold it, and has nothing about what you do with the money from the sale.
https://www.irs.gov/pub/irs-pdf/f1099s.pdf

Since it was her house, she would have a tax exemption from the sale and even if she owed taxes on the sale, it had nothing to do with the bridge loan her dear SIL provided.

 

[Souschef]

See, this is the crazy rules of taxes, so when I lend a work buddy $5.00 for lunch I should report this to the IRS so I can pay his "imputed interest" tax

1099S only wants to know the amount of the sale, who sold it, and has nothing about what you do with the money from the sale.
https://www.irs.gov/pub/irs-pdf/f1099s.pdf

Since it was her house, she would have a tax exemption from the sale and even if she owed taxes on the sale, it had nothing to do with the bridge loan her dear SIL provided.

I agree, that the loan will not show up anywhere. But, whether she has an exemption or not, the IRS cross checks the 1099S against her SS no and her tax return.

 

[pb4uski]

Yes, so the IRS will see that she sold her house and reported the sale on her tax return, calculated any gain and paid whatever tax was due. The IRS has no way of knowing that she borrowed $200k from the OP to buy another house before she sold the house that she reported the sale on.

While I agree that the parties should have imputed interest on the $200k loan the reality is the amount would be minor (rate for loans up to 3 years a year ago was less than 0.6%).... at worst the IRS would say the OP had $1,200 of income that they should have reported and paid taxes on.... so what's the big deal?

 

[Bryan Barnfellow]

What a pleasure to read the body of a thread with the words "loan to relative" in the title, that has a happy ending: money loaned, money returned. I had all kinds of premonitions of a family torn asunder before I opened the thread! We need to see more of these.

-BB%

 

[braumeister]

We need to see more of these.

My BIL paid back a loan once. You could have knocked me over with a feather.

 

[Bryan Barnfellow]

Ahh...refreshing. Thanks, braumeister

-BB

 

[Sunset]

What a pleasure to read the body of a thread with the words "loan to relative" in the title, that has a happy ending: money loaned, money returned. I had all kinds of premonitions of a family torn asunder before I opened the thread! We need to see more of these.

-BB%

+1
I had the same thoughts, another loan to relative problem... Nice to hear good news

 

[IBWino]

Thanks everyone for the comments and advice. I'm now much less nervous about the situation.

Regards,
Wino

 

[Senator]

Even if you would have to declare the 1% on $200K for a few months, she would be able to deduct the same amount on her taxes.

In the end, it is a net zero sum likely. Certainly not much of an impact as to what the IRS would receive.

And, you could have called it a gift, so no income received and no taxes paid. Maybe she just kept it to keep it safe from the evil bank, and didn't even borrow it. A friend can hold your money for you and not pay interest.

I reported a payroll tax thing about my former employer once. The IRS tax guy said, "Are we talking about more than $50K in taxes?"

Since it was only about $1000 in payroll taxes, they never even inquired further.