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Personal loans: Keeping it in the family

What’s a little money between family members? The IRS has a response to that: interest income-tax and the gift tax. For a loan to be a loan, according to the government, interest must be paid. If not, it’s a gift. In either case, it’s subject to taxation laws. Here are a few things to think about when making a personal loan:

• Loans and gifts under $11,000 are safe, but that figure includes all outstanding loans between lender and borrower within a given year.

• If above $11,000, document the loan, including payment terms and collateral.

• Set an interest rate. If you don’t, the IRS will, and tax that income, even if the lender doesn’t actually apply a rate.

• You are allowed a $1,000,000 lifetime gift exemption. In other words, you may give away up to $1 million before the gift tax kicks in, which can reach as high as 49 percent.

• Show that the borrower has the means to repay so the loan is not interpreted as a gift, which will chip away at your lifetime gift exemption.

• And when applying for a mortgage, remember to declare a family loan the origin of a down payment. Failing to do so can result in criminal charges.

HFC Personal Loans


The tips on this website should be considered food for thought only. Lendingtips.com is a clearinghouse of ideas, not a professional adviser. Before any important decision, please consult the appropriate professionals (lawyer, accountant, real estate agency, broker etc.).