I need to borrow a large amount of money from a friend. Its greater than 12K but less than 100K. My generous friend has agreed this will be an interest-free loan and I plan on paying it back in less than a year. However I've read that the IRS will still imposed an applicable federal interest rate on my friend for lending me the money. Is there anyway he can avoid reporting the IRS imposed interest? Maybe report it as a gift?
We thought about not reporting anything to the IRS but we're afraid the IRS may catch wind of the large bank transaction and give us a big headache later. OR maybe they won't....
Does anyone have any prior experience? I would greatly appreciate it.
2007-12-04 15:55:32 · 4 answers · asked by det 1 in Business & Finance ➔ Taxes ➔ United States
You are correct, in part, about the imputed interest on this loan. Your friend won't be tapped for the imputed interest but YOU could be. The income you are receiving in this transaction is the time value of the money lent to you. If you're not paying that money to the lender it IS income to you.
Trying to call it a gift when it clearly is not is risky as well. To legally be a gift there must be nothing given to the giver in return, other than your thanks and gratitude. Remember the "gifts" that Oprah gave to the entire audience a few years ago? Everyone in the audience that day got a brand new car. And while Oprah certainly got their thanks and gratitude, it was short lived for most of the folks. Oprah got something really BIG in return. Free publicity. A LOT of free publicity. And she could not have known that she'd get that either, media mogul that she is. The result? Each of those "lucky" audience members had to pay income tax on the value of the car they received. (Not to mention paying sales taxes to get them tagged, insurance, etc.) Several of them refused the "gift" due to the hassle of raising the money to pay the taxes and many others had to sell the cars to raise the money to pay the various taxes.
This rolls it all back to the imputed interest rule and you'll be stuck paying tax on that.
2007-12-04 16:00:16 · answer #1 · answered by Bostonian In MO 7 · 1⤊ 3⤋
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2016-09-28 01:26:00 · answer #2 · answered by ? 3 · 0⤊ 0⤋
The concept of "imputed interest" applies to the LENDER, not the borrower. If it isn't charged, he is assumed to have given you the same amount and you paid him back so it goes on the LENDER's tax return.
From IRS publication 550:
A demand loan or gift loan that is a below-market loan is generally treated as an arm's-length transaction in which the lender is treated as having made:
A loan to the borrower in exchange for a note that requires the payment of interest at the applicable federal rate, and
An additional payment to the borrower in an amount equal to the forgone interest. <--this is the amount that goes on the LENDER's 1040 schedule B.
There is a narrow exception to this interest:
Limit on forgone interest for gift loans of $100,000 or less. For gift loans between individuals, if the outstanding loans between the lender and borrower total $100,000 or less, the forgone interest to be included in income by the lender and deducted by the borrower is limited to the amount of the borrower's net investment income for the year. If the borrower's net investment income is $1,000 or less, it is treated as zero. This limit does not apply to a loan if the avoidance of federal tax is one of the main purposes of the interest arrangement.
2007-12-04 18:18:42 · answer #3 · answered by Anonymous · 1⤊ 0⤋
I've never heard such a thing. But would it be possible for your friend to write the check(s) to where you want the money to go and then you write your friend payment checks later?
2007-12-04 16:00:56 · answer #4 · answered by pajaisen 3 · 0⤊ 2⤋