I am about to close on a house at the end of the month. My family was going to "loan" me a decent bit of money just to help out on avoiding some interest. Is it ok for them to loan it to me at 0% and not be considered a gift as long as I pay it back or do they need to charge me some kind of interest to avoid getting into gift taxes?
OT: Have a question for the tax experts on the board
- Thread starter civildawg88
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Short answer is they do have to pick up interest income on their tax return. IRS publishes a minimum interest rate each month. If they don’t charge interest on the loan it’s imputed to them based on the minimum rate. If they do charge that interest to you, then you can also deduct it as mortgage interest on your tax return.
www.irs.gov
Applicable Federal Rates | Internal Revenue Service
IRS provides various prescribed rates for income tax purposes.
Can't they list it as a gift if it's below a certain amount and then just gift it back later
You can be given up to $19k in 2025 ($38k by a couple) without incurring gift tax. Do this at the end a year ($19k on 31 Dec and $19k on 1 Jan) and you can game the system.
It is most likely a moot point with the BBB. Even if it is a gift tax put on your family members, and they do a gift tax return they will owe nothing. With the personal exclusions from estate tax being so high when they die unless they are worth more than 15 million as a individual or 30 million as a couple. That's for this year. With the BBB it will probably increase over the years. Their estate can take the gift tax away from their personal exclusion estate tax later after they die. The only ***** about the process is having to do a gift tax return but the CPA can do that when he does your tax return. I might be off a little on my tax law but I think that is close to being correct. I am sure I will be corrected by one of the CPA's.
A couple other thoughts. You didn’t ask for advice but I’m gonna give it to you anyway. My general recommendation is either make it a gift (parents file a gift tax return if over $18,000 or so), or make it a mortgage loan with interest & file the mortgage at the courthouse. Either can head if trouble down the road. That said, do what you want. It’s nobody’s business but yours and the IRS and may be the mortgage company (see below).
if there’s a 1st mortgage involved, the mortgage company may want your parents to sign a statement that the money is a gift. I strongly recommend you don’t commit mortgage fraud by claiming it’s a gift to get the loan if it’s really a loan (interest bearing or not).
if there’s a 1st mortgage involved, the mortgage company may want your parents to sign a statement that the money is a gift. I strongly recommend you don’t commit mortgage fraud by claiming it’s a gift to get the loan if it’s really a loan (interest bearing or not).
Thanks for the advice. The amount is over 50k so it would be more than the gift tax threshold
Maybe I'm dumb, but I clicked the link and then looked at the latest document. Am I missing the minimum interest rate in the document? I don't see one mentionedShort answer is they do have to pick up interest income on their tax return. IRS publishes a minimum interest rate each month. If they don’t charge interest on the loan it’s imputed to them based on the minimum rate. If they do charge that interest to you, then you can also deduct it as mortgage interest on your tax return.
Applicable Federal Rates | Internal Revenue Service
IRS provides various prescribed rates for income tax purposes.
Yeah, I had a personal experience with this about ten years ago when we moved to Arkansas. I was traveling back and forth from Memphis to my new job for a few months while we were looking for a new house, and when we eventually found what we were looking for, my father in law loaned us some money to close on the new house while we were still selling our old one.
Long story short, after looking through the last 3 months of bank statements, the mortgage company wanted a letter from my father in law stating that it was a gift which he of course did not want to do since it was well over the untaxed threshold. So plan B was to go to the courthouse and file it as a loan, and it was written up in a way that ensured that he'd be paid back immediately after selling our old house. This was the only way that we could get approved for the new mortgage while still owning our old home as well, and it was a complete nightmare at the time, but it makes sense thinking back on it,
Not a lawyer or an accountant. But as I understand it, for a loan to not count as a gift, you must be charged interest. There’s a published rate of what is acceptable that varies by year (something like 4.5% last I checked, if I’m not mistaken)
You can set this up as a loan with interest and the loaner can “forgive” the interest at the end of the year and should be well within the annual exclusion (19,000 per gifter per recipient).
Or if they’re not expecting it to be paid back at all, they can forgive the whole annual exemption and have it knocked out pretty quickly. If you’re married and the gifter is married, a total of $76,000/year? I’m open to correction on this.
You can set this up as a loan with interest and the loaner can “forgive” the interest at the end of the year and should be well within the annual exclusion (19,000 per gifter per recipient).
Or if they’re not expecting it to be paid back at all, they can forgive the whole annual exemption and have it knocked out pretty quickly. If you’re married and the gifter is married, a total of $76,000/year? I’m open to correction on this.
They can also just forgive the interest each year. I think they'll have to recognize it as income though, but not a major deal. Basically $625 in taxes for the entire first year of interest forgiven assuming a 5% minimum interest rate and a 25% tax bracket.
Another option: If by "family" you mean "parents", and your parents aren't worried about having zero legal right to recover the money, they could give you $19,000 each, so $38,000 total, and loan you the remainder. In January, they can forgive the loan (or gift you the money to repay it, not that it matters which way but maybe easier to document a $19,000 from each parent that way). They'd have to recognize income from the interest from the date of the loan until the end of the year, but not going to be a massive deal on a loan that small.
You’re not dumb. You’re asking the right questions. Rates for loans being paid monthly are 3.96% short term, 3.99% mid term & 4.71% long term. I think short, mid & long term are 0-3 years, 3-10 years & >10 years. The rate table is the second link if you scroll down to the bottom of the page.
Pain in the a**. But the difference between a 1st mortgage & a 2nd mortgage isn’t the intent of the parties, it’s which lender gets to the courthouse first to file the mortgage. So from the bank’s perspective, they have to be absolutely sure that money from your parents isn’t secured by the new house.
You’re not wrong. Although there is a risk (probably small) the IRS could look at it & say there was never any intention to charge or pay interest and the whole thing was really a disguised gift. You could mitigate that by separating the loan payments & the annual gift (kids make the loan payments monthly & parents gift them money at birthdays & Christmas). Also, the lender might still have to pick up the forgiven interest as income. Never actually seen this in real life. But this is a situation I’d get a good tax attorney to help set it up right from the beginning.
I really appreciate all the help. It's crazy how complicated our tax code is
Have them give you the money
pay it back
don’t report it.
chances of audit are slim. Chances of them finding that on an audit are slim too.
Make sure they file a lien against the property. Could create tax problems for you if you sell the property in less than a year.
That’s what I did many years ago when I borrowed money from my parents. Never heard a word from the IRS.
I agree here. As long as their estate isn't over $14 million as it stands now, no tax will be owed, but a gift tax return would need to be filed.