Family Loans Question

[Bades]

If I were to take a family loan to pay for a down payment on a piece of property how is that seen in the eyes of the IRS? I know you can give away $14k as a gift tax free. But I'm not sure what the difference is if it's a family loan?

[disneysteve]

http://www.savingadvice.com/forums/personal-finance/70439-lending-money-tax-implications.html

See this thread. Also, see my post in that thread that links to another thread on the topic.

[phantom]

I agree that the loans to and from friends are generally a bad idea. If this loan means that you are putting down less than 20% on a house, that is also generally a bad idea.

In addition to how the IRS sees it, you should be concerned how your lender will see it. Most lenders will want to see where you're getting the money for your down payment, and if it comes from a family member, they will probably want a letter stating that the money is a gift and not a loan.

[Bades]

I appreciate the concern with the family loans, but it's not going to be an issue.

My dad has more money than he'll ever need and is enthusiastic about helping me with a down payment on an investment property. My dad owns some rental properties and he and my uncle own their own manufacturing company. My family is entrepreneurial in spirit, and they don't mind helping the younger generation get a leg up. We are very close and would never let money get between our family.

[Bades]

You should never borrow money from friends or family.

???? A lot of small businesses would've never been started if this was the case...

[~bs]

the irs has prescribed AFR rates that should be used. If interest rates on the loan is below market, the imputed interest rates should be used for calculation of interest income/expense. But I believe it also depends on the size of the loan. Loans below 10k let you avoid these rules. But consult with a tax adviser.

caution should be exercised when borrowing money from family/friends & partnerships. But as long as you are aware of the potential risks and do your due diligence, I don't see why not. Word of caution though, money (or lack of it) can affect in strange ways. Just look at the high profile cases regarding inheritance. What one may see as "fair", another sees something entirely different.

[~bs]

See this thread. Also, see my post in that thread that links to another thread on the topic.

I believe loans below 10k are exempt from the imputed interest rules. If the loan was more than that, even for a short term, one party would report imputed gift income, if personal. If business, then one party would record income, the other expense.


always consult with a tax professional.

[Bades]

@~bs

Sound advice.

My dad and his brothers and sisters have already been through the "inheritance game". My family is fortunate enough where everyone has been very cooperative and have been zero problems. Of which the attorney stated is a very rare occurrence.