Tax Consequences of Loans to Family Members?

To properly structure a loan between family members so as to avoid tax consequences to the person being lent the money, does the person lending the money need to charge the prevailing rate of interest. If so, is the rate prime plus one, or some other amount. Are there any other potential requirements that I should look into?

Tax Consequences of Loans to Family Members?consumer credit counseling

You have received generally correct answers so far except that the interest rate does not have to be at the prime rate. In order to avoid the imputed interest rules on low or no interest loans you will need to charge the Applicable Federal Rate for your loan to a family member. These rates are published monthly and are used by taxpayers who are making loans to family members. The rates are published for short term, mid term and long term loans. Rates are provided for monthly, quarterly, semi-annual and annual payments. If you use the proper rate for the month you make the loan IRS will have to accept the rate that you use no questions asked. These rates are generally lower than the prime rate and other commercial rates for similar loans.

Tax Consequences of Loans to Family Members? loan

You are right about prime plus 1, the IRS has ruled favorably on that.

But you do have to claim the interest received as income on your taxes, because it is. Just like interest from savings or gains from stocks. But you won%26#039;t be paying taxes on the principle repayment, just the interest portion.

The tax man sucks.|||In addition, have a signed note to avoid the IRS trying to collect Gift Taxes.

IF the receiver of the funds fails to pay the loan, TECHNICALLY, you can write off the loan on your taxes, BUT the person failing to repay the loan must report it as INCOME in the year of default.