Gift tax on no interest loan.?

Question

If a couple gives a loan to a 3rd party with no interest how is the gift tax calculated? The irs says that a no-interest loan is considered a gift, but the amount of the loan isn't a gift. Is the interest that would have been paid considered the gift amount? How is this calculated?

The amount is over 12,000 and www.irs.gov does not explain how to calculate the gift amount in this situation. Atleast not from my reading of the entire Pub. 705 I believe it is.

Answer 1

Section 7872 of the Internal Revenue Code provides that a no-interest loan can represent a gift. If the loan is bona fide -- the lender intends to be repaid -- then sec. 7872 applies; if the lender does not expect repayment, then the full amount "loaned" is a gift.

Assuming you are under sec. 7872, there are two basic situations -- a loan for a specific term, and a demand loan. I'm working from memory here, but I believe that in the case of a demand loan, the amount that should have been charged as interest each year is a gift. In the case of a term loan, the gift should be the difference between the loan principal and the present value of the loan principal discounted at the appropriate interest rate.

Since the gift consists basically of interest on the principal, it would take a sizeable loan to generate a taxable gift.

Please consult a tax advisor for more specific advice.

Answer 2

Have you tried the FAQ at www.irs.gov? This isn't the kind of question you should rely on strangers on the internet to answer for you!

Answer 3

What is the amount? Unless the amount is large, I wouldn't worry about it. If it's a large amount, maybe talk to your tax preparer.

Answer 4

Gifts under $11,000 per year are not subject to gift tax.