Discussion:Family Loans
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Discussion Forum Index --> Tax Questions --> Family Loans
| 21 June 2007 | |
| I have a client that wants to loan money to his son for the purchase of his first house. The son will be demolishing the house and rebuilting. He is loaning him 200k for 1 year until the house is demolished and rebuilt. The son will pay him principal and interest(5%) when he secures a bank loan at the when the year is up. My client will draft the note.
Is the interest to the father is taxable on the note. Is there a better way to structure this transacation? | |
| 21 June 2007 | |
| Of course the interest is taxable. Unless it is forgiven as a gift from father, and not paid by son. | |
| 21 June 2007 | |
| Yes, the interest is income to the father.
What is wrong with this transaction as it stands? Dad is loaning money; dad is earning money on his investment...he could "gift" the 200K to the son. The son could gift it back at a future date, but it sounds like they are trying to make a legit loan here and I don't see anything wrong with it myself :) | |
| June 21, 2007 | |
| You need to above the AFR rates, which is going to call for about 5.5% right now, I think...have the son secure the note with the home so that it's deductible to him... | |
| 21 June 2007 | |
| As far a securing the note with the home can that be done with out an attorney? | |
| 21 June 2007 | |
| Actually if the loan is less than $100K you can arrange for father's income recognition to be limited to son's investment income. | |
| 22 June 2007 | |
| Is there a possibility to treat the interest as a gift and therefore non-taxable? | |
| 22 June 2007 | |
| the gift part would be if he didn't pay it. If he pays it, it is not a gift. Think about it. It is for the use of money for a period of time. If he wants to make a gift, have him give cash to his father with no obligation for dad to lend him anything. See how generous he is then. | |
| 22 June 2007 | |
| It doesn't matter if he pays it or not, does it. Once over the $100,000, the imputed interest rules require income to be reported I thought. Even if nothing paid to father, IRS will look at it as if cash was paid, and then gifted back to the son. Either way, it is taxable interest. | |
| 22 June 2007 | |
| Say the note exists for $200,000 @ 5.5% simple interest. If son pays $11000 int in yr 1. Father reports income. If son don't pay it, it is treated as if the father gave the son a gift of $11,000. | |
| 22 June 2007 | |
| If that is the intent of the father. Father still picks up the $11,000 in interest though, correct? | |
| 30 June 2007 | |
| Yes, I think you are right. I found this: Below-market or “gift” loans
Loans in excess of $10,000 made with no interest or with interest that is below the Applicable Federal Rate (AFR) may result in income to the lender .20 . In a “gift loan” situation, the lender is deemed to have made a gift to the borrower of the forgone interest (the difference between the actual interest charged and interest that would be charged at the AFR), and the borrower is deemed to have retransferred the amount to the lender as interest payments. The deemed gift is not includible in the income of the borrower (although it may be subject to gift tax), but the deemed interest is includible in the income of the lender. See 3215. This would imply that there is never a time when a lender can make a loan to a family member and not have to report some form of interest income am I correct? | |
| 30 June 2007 | |
| No. There is a special rule on interest recognition when the loan is less than $100,000. (Note the "may" in your citation.) | |
| July 1, 2007 | |
| Can they split the loan into 2 loans? 1 loans for $100K w/ interest meeting AFR minimum and another loan for $100K w/ no interest. Thereby limiting the interest on the 2nd loan to the son's investment income. | |
