Yes, a family loan can be interest-free, but only if the total amount loaned is under $10,000, and the money isn't used to buy income-producing assets, due to an IRS exception; otherwise, you generally must charge at least the Applicable Federal Rate (AFR) to avoid the IRS treating the forgone interest as a taxable gift or income for the lender, requiring proper documentation like a promissory note.
The "$100,000 loophole" for family loans refers to a tax rule where lenders avoid reporting imputed interest if the total loan amount (plus any other outstanding loans to that borrower) is $100,000 or less, and the borrower's net investment income is $1,000 or less; otherwise, the lender's taxable imputed interest is limited to the borrower's actual net investment income, avoiding the higher Applicable Federal Rates (AFR) normally required, making it a way to offer lower-interest loans with minimal tax hassle for the family.
The Right Way to Lend Money to Family and Friends
There's no law preventing you from giving an interest-free loan to a family member in NSW. You don't need to charge interest, and you can set the repayment terms however you like. However, what's important is how you document the loan.
If you lend more than $10,000 to a relative, charge at least the applicable federal interest rate (AFR) — and be aware that the interest will be taxable income to you. If you charge no interest or below-AFR interest, taxable interest is calculated under the complicated below-market-rate loan rules.
Interest. Most people who lend to family or friends do not charge interest. However, you should consider whether you will lose significant earnings on the money during the period. It could be a good idea to charge at least the same interest that you would earn on the money if it stayed in your possession.
Zero-interest loans might seem like a no-cost way to borrow money, but they come with hidden risks. These loans can encourage overspending and impulse purchases, and they often come with strict repayment terms and hefty penalties if you miss any payments.
As of 2025, you can give an adult child up to $19,000 in a year before you must file a gift tax return. If your adult child is married, you can also give up to $19,000 to their spouse.
You can charge any interest rate you agree on, but to avoid unwanted tax implications (like gift tax or imputed interest income for you), loans over $10,000 must charge at least the IRS Applicable Federal Rate (AFR), which varies monthly and by loan term, or face tax consequences on the "forgone" interest; below this rate (or zero interest on loans under $10k), the difference is treated as a taxable gift. A rate of 2-4% above the AFR is common for fair family loans, but using the AFR ensures clean tax reporting for both parties.
Regarding federal income tax, you can hire and pay your child up to $15,750for the year (per child), and they will not be subject to federal income tax for 2025.
Scenario: Interest-free loans
If you don't charge interest, the IRS can say the amount of interest you should have charged was a gift based on current tax rules. In that case, the interest money goes toward your annual gift-giving limit of $19,000 per individual as of tax year 2025 (up from $18,000 in 2024).
Yes, you can get a 0% interest loan, commonly found as promotional offers for cars, furniture, or credit cards, but they usually have strict terms like a high credit score requirement and a limited time period, with high retroactive interest or fees if you miss payments or don't pay in full by the deadline. True 0% APR loans are different from "deferred interest" offers where all accrued interest is charged if the balance isn't cleared by the end of the promo. Always read the fine print for details on fees, timelines, and what happens if you're late.
The IRS $600 rule refers to a change in reporting requirements for third-party payment apps (like Venmo, PayPal) for taxable income from goods and services, where platforms must send a Form 1099-K if you receive over $600 in a year, intended to capture gig economy/side hustle income, though delays and phased implementation have adjusted the timeline, with current rules for 2024 using a higher threshold ($5,000) before fully phasing to $600 for future years, but remember all taxable income, regardless of form, must always be reported.
Yes, you can transfer $50,000 to a family member, but you'll need to report it to the IRS by filing Form 709 because it exceeds the 2026 annual gift tax exclusion of $19,000 per person, though you likely won't owe tax unless your total lifetime gifts surpass the very large lifetime exemption. For large cash transfers, banks also report it to FinCEN, and you might need a formal gift letter for things like a home down payment to prove it's not a loan.
Those with a 640 or higher credit score are likely to find a number of options for a $10,000 personal loan; those with higher scores may have more options as well as more favorable terms.
If you want to invest $10,000 over 10 years, and you expect it will earn 5.00% in annual interest, your investment will have grown to become $16,288.95.