Lifetime gift tax exemption

[street]

I have asked some questions on this before and have used this option in the past with a large gift to my son. Tis time I have a different scenario thou.

This time I would like to use it again for an amount of 75K for which they would like to buy a shop. The shop came up for sale from a friend of his that retired where my son works at. It is a good buy and is in the city and would be able to resell pretty easily I would think. He calls it an investment. Lol

So, if I gifted him the 75K and with the agreement for him to gift us/me back 10K a year till it is all paid back. I'm not going to just gifting that amount he will need to pay it back but it would be with no interest and no loan etc.

So, if I did this what are the ramifications, issues and problems with this method? Is their any tax issues that may happen I'm not aware of?

 

[SecondCor521]

I'm not a CPA and I'm not your tax accountant. You should double check everything yourself. The following is just my opinion:

A gift that is paid back over time is considered a loan by the IRS, even if there is no interest charged (and probably even if there is only a verbal agreement).

If you don't charge what the IRS says is a reasonable rate of interest, then the probable treatment is that you would be considered to be gifting the person the interest they didn't pay you.

Given the 7.5 year duration of the loan, you'd probably be looking at the mid-term AFR, which is about 1% as of August. That means you'd be "gifting" them $750 in interest if you charged 0% ($75K * (1% - 0%) = $750), and lower amounts each subsequent year. The $750 would obviously be under the annual gift exclusion amount (assuming no other large gifts to the same individual).

The biggest problem in this scenario to me are two-fold: (1) A lack of communication and detail on the deal will probably result in misunderstandings or ending up in a scenario that wasn't thought of before the deal was initiated, and (2) Something happening where they don't pay you back according to the terms, and you have to decide how to handle that in your relationship.

Of course, everyone says they've thought of all the details and that the person will *of course* pay them back. But it does happen, and it probably happens to people who think they've thought of all the details and are 100% sure they'll get paid back.

There could be tax issues if the person doesn't pay you back. You could google terms like "debt forgiveness income" and "bad debt".

 

[street]

Thanks for that advise.

I'm sure there may be a legal issue but seems like they are both legal ways to do business. Your #1 & #2 isn't a concern to me for many reasons. Being legal is what I'm looking for not trusting and being honest that won't be an issue.

 

[RetiredHappy]

When I helped pay for my son's home (several hundred-thousand dollars), I had intended for it to be written off through time, through the $15K gifting limit. I was warned that I should not do it that way. In the end I submitted a form to IRS that showed the amount of money that I have gifted to my son for his home purchase.

 

[Sunset]

Why not make it simply a loan at 1% , they get to write off the loan expense against profits, and you could always gift them back the few hundred the loan costs per year.

That way if they go bankrupt, you can claim a loss of the money.

 

[street]

Why not make it simply a loan at 1% , they get to write off the loan expense against profits, and you could always gift them back the few hundred the loan costs per year.

That way if they go bankrupt, you can claim a loss of the money.

That seems like a reasonable way. I was thinking to do the 709 form and going that route. I can give them the money and wouldn't miss it. I just think it would be better for them to have some skin in the game. They my son and his wife will end up with everything someday anyway.


My son would never ask for one red penny. He has been successful and got to where he is at on his own. I want to help if he will except but not for free.

 

[finnski1]

That seems like a reasonable way. I was thinking to do the 709 form and going that route. I can give them the money and wouldn't miss it. I just think it would be better for them to have some skin in the game. They my son and his wife will end up with everything someday anyway.


My son would never ask for one red penny. He has been successful and got to where he is at on his own. I want to help if he will except but not for free.

I'd say it will all work out fine. You raised an honest hardworking son and you both will make this work. I do like the 1% loan idea from Sunset.

 

[Badger]

Why not make it simply a loan at 1% , they get to write off the loan expense against profits, and you could always gift them back the few hundred the loan costs per year.

That way if they go bankrupt, you can claim a loss of the money.

+1 It's a loan not a gift if they are paying it back. Have him sign an agreement with an amortization schedule and give him a receipt each year for the payments. Have the documentation then handled the payments however it works best for both of you.


Cheers!

 

[nvestysly]

The IRS definitely has rules regarding what constitutes a loan and what constitutes a gift. For a few hundred dollars (that's what we paid) an attorney can provide the guidelines and may be willing to draw up the paperwork and file it with the county too.

If you want him to "have skin in the game," my suggestion is to make it as formal as possible/reasonable while also making it as lenient as possible/reasonable.

 

[OldShooter]

... So, if I did this what are the ramifications, issues and problems with this method? Is their any tax issues that may happen I'm not aware of?

WADR, SGOTI cannot be counted on to provide valid opinions on tax matters. Also, the IRS has a blank check to ignore transactions where the only objective is tax avoidance.

Google gave me this: " ... even where a taxpayer ostensibly observes all nuances of a particular law, if a transaction’s purpose is merely to fabricate the circumstances or create the pretenses necessary to achieve a certain tax goal, courts could resort to this body of law to impede those tax benefits. Under the umbrella of anti-avoidance law are at least five doctrines: substance over form, sham transaction, business purpose, economic substance and step transaction. Though the semantics may differ, there is a good deal of overlap between them, and it is not unusual for a court to deny tax benefits on multiple bases. ... "
​

You really need to consult a tax-oriented CPA for advice on tenable strategies.

 

[calmloki]

If you do a loan the IRS will figure you charged an "imputed interest":

https://turbotax.intuit.com/tax-tips/tax-payments/irs-tax-rules-for-imputed-interest/L7UbulHpC

Looks like right now for a loan over nine years the interest the IRS wants to see charged is 1.78%:

https://www.nationalfamilymortgage.com/afr-rates/

Consider selling him your property on an interest only basis and have the deed be a Transfer On Death deed. We did that earlier this year, and in Oregon it involved several filings and recordings with a certain time between, but our lawyer researched it and made it happen, so I believe it to be doable and legal.

 

[Sunset]

Well if the loan was for 9 yrs, the interest is a bit below 1%.

Mid-term IRS AFR Rates - For Loans More Than 3 & Up To 9 Years 0.91%

However, the interest rate doesn't really matter, so if 10 yr loan is needed, it could be 2% for example which is $1,500 interest in the first year.
If OP later decided to gift his son some money, it might be large enough to cover, or more than cover the interest.

If OP exactly matched the interest cost in the gift, this would/could be claimed that the interest was really 0%. Especially if it was written into the loan.

However, not matching the gift to the interest would be allowed, as a person is not disallowed gifting to a recipient simply because they loaned money to the recipient. Gifts of a small nature are often in cash, and not reported.

 

[street]

Thanks for ALL responses. I will think about it and will talk to him about what he thinks about giving him money. I don't beleive he will except my offer. He had to put down some earnest money signed contract of agreement and will take over ownership come first of the year. he has some time to decide how he want to proceed.