Is there any tax penalty (for either party) for taking out a large loan from a family member?
Sunday, October 25th, 2009 at
2:09 pm
I just didn’t know if the gift tax applied, or how else loans work. Thanks.
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As long as it is structured in writing as a loan with regular payments, appropriate interest charges, and the payments are made timely, you should be OK. The lender will have to include the interest as income on his tax return, though. If the loan is a mortgage, the borrower can deduct the interest paid if he itemizes his deductions.
To find out what the minimum interest rate is, go to http://www.irs.gov and search on "Applicable Federal Rate" to find the rate for the month when the loan is made.
The big thing is, if there are no documents like an amorization table, the interest rate is too low, and there is no proof the borrower is the one making payments on the loan (like canceled checks), the IRS may deem it to be a gift. But, gift tax doesn’t kick in until the amount of all gifts to a single person is more than $10,000 per year. In other words, if you are married and have two kids, your mother (or uncle or whoever) could give your family $40,000 per year before gift tax would be due.
I think if it is recorded and there is interest involved the loaner claims the income and the borrower can deduct the interest paid if applicable (like in a loan for real estate…)
Don’t know much more though…sorry
the interest rate involved has to be about the market value there r rulse about this and there should be a publacation on this get in touch with irs or go to there web site i do not think there is a penilty if it is done right
No tax consequences if it’s really a loan. If it’s a gift just being called a loan, then the normal gift limits apply.
A loan is not a gift. The party making the loan will have to declare the interest paid on the loan.
Assuming that the transaction passes the "arms length" test, i.e. it’s really a loan with a properly executed, signed note, interest payments at sometinng close to market rates, etc. there are no penalties involved for either party.