How To Arrange A Loan Between Family Members

Home News How To Arrange A Loan Between Family Members
South County Mortgages Home Loans
+

Parents can help their children with a down payment without running afoul of the IRS

Back when they were feeling flush, many parents helped their children with down payments on their first homes. Now, some are reluctant to give, worried that they won’t have enough left for their own retirements or that their children may become too dependent on handouts.

Fortunately, there’s an alternative to not helping at all: Lend them the cash. If you want to help your children (or convince your parents to help you with a down payment), then there are several ways to do so without triggering nasty tax penalties. Los Angeles CPA Michael Eisenberg recently helped a father structure a $2,000-a-month loan to his out-of-work son. The expectation is that the economy will turn around and the son will get a new job; the documents require him to start paying the loan back in 2011. “Make sure everyone is clear on the terms–is it a loan or a gift?” Eisenberg says. “You’ve got to be clear which way you’re going, or it can ruin the family relationship,” he adds.

An ambiguous loan can also ruin your relationship with the Internal Revenue Service, which might argue the loan is really a gift, possibly subject to gift tax. The key to avoiding either family or tax trouble is to put things in writing and, in most cases, to charge a minimum IRS-set rate of interest. The interest they pay is taxable income to you.

There are exceptions: If you’ve lent a child less than $10,000 in total, you don’t have to charge interest. Speak to a tax professional for the best advice on this.

The IRS minimum interest rates range from 0.7% a year for loans of three years or less to 4% for loans longer than nine years. On a loan of $20,000, those interest rates fall between $140 to $800 a year.

Setting this up doesn’t need to be expensive. You can buy standard loan forms through Nolo.com or other similar websites. But if you’re lending a substantial amount, or for a long period, you should consult with your lawyer or accountant about the gift and estate tax angles and how any outstanding loan will be treated should you die. If you need professional advice, reach out to your lawyer, tax professional, or loan officer to answer any questions that may come up throughout the process.

 

Are you a #HappyHomeowner? We’d love to hear about it! Tell us on social media or email pj@scmtg.net.

 

South County Mortgage is a licensed mortgage brokerage providing better than bank service and better than bank rates to Rhode Island residents for over 20 years. Visit our website for more info, www.scmtg.net.

3 Comments

  • Can I just say what a relief to find someone who actually knows what theyre talking about on the internet. You definitely know how to bring an issue to light and make it important. More people need to read this and understand this side of the story. I cant believe youre not more popular because you definitely have the gift.

  • http://canadianorderpharmacy.com/

    You made some decent points there. I looked on the net to learn more about the issue and found most people will go along with your views on this site.

Your email address will not be published. Required fields are marked *