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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?

2006-12-09 17:20:46 · 4 answers · asked by Anonymous in Business & Finance Taxes Other - Taxes

4 answers

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.

2006-12-10 03:35:36 · answer #1 · answered by waggy_33 6 · 0 0

you will possibly get any pupil loan pastime deduction once you record your income tax return. in case you pay off the loan with pastime the guy receiving the pastime might have that as income yet that doesn't be a deduction to you. If somebody factors the money there is incredibly little effect to the two of you until the quantity is in far greater suitable than $12,000. if so it would remember on the tax situations of the giver of which the possibilities are greater distinctive and complicated than this dialogue board can shield. it would basically prepare if the giver dies with an property in far greater suitable than $2 million whether the date of loss of existence ought to alter that discern.

2016-10-18 01:24:17 · answer #2 · answered by Anonymous · 0 0

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.

2006-12-09 17:38:57 · answer #3 · answered by Jeff H 5 · 0 0

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't be paying taxes on the principle repayment, just the interest portion.

The tax man sucks.

2006-12-09 17:32:01 · answer #4 · answered by Gem 7 · 0 0

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