Personal loan question

[Raymond01]

I'm thinking about loaning my child approximately $150k to buy a dwelling. I'd like it to be a no interest loan. Can I do that legally? Do I need to put it in writing some how? Will the IRS balk at no interest? I think they would consider the interest I would normally charge to be a gift, but that amount would be much smaller than the annual gift maximum. So.... thoughts?

 

[RE2Boys]

See this on imputed income.

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

A loan with no interest and not in written form would not be enforceable thru the courts and would never be considered as a legitimate bad debt.

 

[RunningBum]

If the loan is to help them qualify for a mortgage, the mortgage company is going to require a statement from you that it is a gift, not a loan. If it's to give them enough money to not need a mortgage, then no one will ask for such a statement.

 

[FLSUnFIRE]

If the fair market interest would be over the gift tax limit then you'd have to pay gift taxes on the imputed interest.



When I bought my first house I was financed by my parents, it was a win-win as they are super conservative and were in CD's paying nothing (well nothing at the time, we are now in NOTHING territory).. when they mentioned the crappy renewal rates, I suggested that I borrow from them at market rates rather than the bank taking the spread. The title company wrote up and recorded the mortgage, I paid my folks principle and interest and they paid taxes on the interest and I wrote it off my taxes. It was super easy and never any question by the IRS. It felt a lot nicer paying interest to my folks than a bank and I saved on BS fees and appraisal and was able to borrow 100% without PMI and didn't have to futz with escrow. When rates went down my dad suggested we drop the interest rate... I agreed once and we re-amortized it once but I refused his offer the next time as rates dropped further and the last few years I was paying about 2% over market rates but it stayed in the family so I didn't really care.


Not the question you asked but my 2¢ anyway... charge fair market interest (it's cheap, you get a little return, and it keeps things clean). You are still doing them a favor by saving on the BS fees and hassle of dealing with a bank and no stress of the bank wire coming in day of close! If they run into issues, you're not likely to foreclose on them either. They also get the psychological benefit of knowing they did it themselves... yes you helped but not at any real cost.

 

[homestead]

Gift them the entire years interest in Jan and charge them the going rate for interest on the loan.

 

[travelover]

If the fair market interest would be over the gift tax limit then you'd have to pay gift taxes on the imputed interest. ........

.

The gift tax only applies once you surpass your exclusions. In 2021, the IRS made the lifetime amount $11.7 million for a single taxpayer or $23.4 million for a married couple. After giving out money or property exceeding this threshold, your gift tax rate will be between 18 percent and 40 percent, depending on how far your cumulative gifts eclipse it. You will also need to fill out IRS Form 709 with your return.

 

[euro]

From the IRS point of view, you have to charge a minimum interest rate for personal loans, called Applicable Federal Rate (AFR) https://www.investopedia.com/terms/a/applicablefederalrate.asp

The rate depends on the length of the loan term and the IRS updates this rate once a month. So, you need to look it up when you sign the paperwork (then it is locked in at whatever it is for the rest of the loan term). The AFR for a >20 year term was 1.90% in November 2021. Not sure the December rate has come out yet.
Of course, you are free to charge a HIGHER rate, if you want.

You will have to report the interest as income at tax time and your child will be able to deduct it from their income. You will have to send your child a form 1098 and report to the IRS respectively

 

[Raymond01]

Thanks everyone for the input.

Part 2 of the question. To do this, I'd have to sell securities. I can sell from my inherited IRA and pay the taxes, or I can sell from my joint account. I am at the point where I'm doing Roth conversions, and I've already done some for 2021. Does it make sense to sell from the IRA account to get more money out of the tax deferred area?

 

[Time2]

Golly what a nice Dad! I'm charging my daughter and son in law 4%. On a mortgage I gave them. I borrowed the money on a margin loan at 1.58%, that could go up (or down) anytime.
It is a fixer upper and I want them to fix it, then get a bank mortgage asap. The second year is at 6%. More incentive.
Plus hurry up before rates rise.

 

[Raymond01]

.

So according to what travelover is saying, I really don't need to charge interest, I could just gift the money. I would have to file a one time gift tax form, but I wouldn't really owe any gift tax because its below the lifetime amount. Here's an article that seems to back that up.

https://turbotax.intuit.com/tax-tips/estates/the-gift-tax-made-simple/L5tGWVC8N

 

[travelover]

So according to what travelover is saying, I really don't need to charge interest, I could just gift the money. I would have to file a one time gift tax form, but I wouldn't really owe any gift tax because its below the lifetime amount. Here's an article that seems to back that up.

https://turbotax.intuit.com/tax-tips/estates/the-gift-tax-made-simple/L5tGWVC8N

Yes, the whole gift tax thing is an attempt to thwart efforts to avoid inheritance taxes by giving away all your dough to heirs before you croak.

 

[Raymond01]

Form 709 looks like a pain to fill out and it seems none of the basic tax software programs include it.

 

[Doingitwrong]

So according to what travelover is saying, I really don't need to charge interest, I could just gift the money. I would have to file a one time gift tax form, but I wouldn't really owe any gift tax because its below the lifetime amount. Here's an article that seems to back that up.

https://turbotax.intuit.com/tax-tips/estates/the-gift-tax-made-simple/L5tGWVC8N

Yes.
The reportable gift would be $150k less the annual exclusion of $15k per person.
If you and son are single $150k - $15k = $135k gift
If you’re married you’d file 709 show $75k -15k = $60k gift and spouse files 709 showing the same.
If you’re both married give each half-
You $37.5k -$15k = $22.5k gift to son
And the same gift to sons spouse.
And your spouse does the same.

 

[Doingitwrong]

Form 709 looks like a pain to fill out and it seems none of the basic tax software programs include it.

Cash is simple.
Let me know if you get stuck on a line.

 

[Raymond01]

Cash is simple.
Let me know if you get stuck on a line.

Great, thanks!

 

[target2019]

Form 709 looks like a pain to fill out and it seems none of the basic tax software programs include it.

$150K is a nice gift. But it may also work if you make smaller gifts of 15K each year.

 

[Raymond01]

$150K is a nice gift. But it may also work if you make smaller gifts of 15K each year.

N

He needs the money all at once to buy the new condo.

 

[Raymond01]

It seems to me the gift route with him paying me back each month with no interest is the way to go. There are no tax implications except filing the form 709. If I made this a personal loan, per the IRS I would need to pay a minimum interest, and we would each need to claim interest on our taxes each year. Thoughts?

 

[RE2Boys]

You really need to first decide if this is intended to be a gift or a loan? A gift has no expectations of being repaid, and repayment can not be enforced under any law.

When I worked at a CPA firm (my semi-retirement job), I remember one elderly parent that had structured a loan for a son to purchase a house and she carried the mortgage loan. The son got to deduct the interest paid on the mortgage each year on his taxes and his mom had to report the income from the loan on her taxes. And each year in our files the mom had a formal letter to her son forgiving part of the loan as her annual gift to her son. Mortgage was recorded at the court house. So she retained an enforceable loan, the son got the tax benefit of home ownership (mortgage interest deduction).

 

[RunningBum]

It seems to me the gift route with him paying me back each month with no interest is the way to go. There are no tax implications except filing the form 709. If I made this a personal loan, per the IRS I would need to pay a minimum interest, and we would each need to claim interest on our taxes each year. Thoughts?

The issue I see is that you've used up some of your estate exemption space without really gifting if you son is paying it back. You may look at how large the estate exemption is today, but in 2026 it will be cut in half unless action is taken. What RE2Boys suggests in between our posts seems to make more sense.

Alternately, if both you and he are married, you have $60K in gifting this year and $64K next year so you could gift nearly the whole amount in Dec/Jan without cutting into your estate exemption, so if you want him to pay it back you haven't used any of your exemption.

 

[VanWinkle]

From the IRS point of view, you have to charge a minimum interest rate for personal loans, called Applicable Federal Rate (AFR) https://www.investopedia.com/terms/a/applicablefederalrate.asp

The rate depends on the length of the loan term and the IRS updates this rate once a month. So, you need to look it up when you sign the paperwork (then it is locked in at whatever it is for the rest of the loan term). The AFR for a >20 year term was 1.90% in November 2021. Not sure the December rate has come out yet.
Of course, you are free to charge a HIGHER rate, if you want.

You will have to report the interest as income at tax time and your child will be able to deduct it from their income. You will have to send your child a form 1098 and report to the IRS respectively

^^^^^^^This
I currently have a mortgage on my daughters house charging the minimum allowed of 1.1%(based on the date of the loan) on 20 year loan. Sounds like low return, but it is beating my bond funds this year.........

VW