parents can make a below market or even 0% intra-family loan. A loan is not a gift unless/until forgiven. But the IRS will impute interest to the parents who must report it on their income tax return. The interest rate for this is based on something called the AFR and is usually quite a bit lower than market rates.
As far as the IRS is concerned, there is no such thing as an interest-free loan. Loans without interest, or at below-market interest rates, are recharacterized so that the lender must recognize market-rate interest income.
When money is transferred with the expectation of repayment, it's a loan. In this case, the person who loans the money can expect to be repaid (typically in interest payments), and they actually enforce the debt. And, it usually involves a formal agreement signed by all parties.
It's a straightforward deal: you get money that only needs to be repaid at the principal amount. However, for the lender, there are substantial tax ramifications in offering a zero-interest loan or any loan with interest below the Applicable Federal Rate (AFR) set by the IRS.
If you lend the money at no interest, the IRS can consider the loan a gift, making you liable for gift taxes.
Even though no interest may be paid, the parent will be required to report income in that amount. If the loan interest is deductible by the child, they may take that deduction. With a no-interest demand note, the parent is also making a gift.
The value of the loan will remain as part of the estate as an asset. If the loan is ever forgiven it will, at the point of forgiveness and not before, count as a gift instead.
The $100,000 Loophole.
With a larger below-market loan, the $100,000 loophole can save you from unwanted tax results. To qualify for this loophole, all outstanding loans between you and the borrower must aggregate to $100,000 or less.
Key Takeaways:
Cash gifts and income are subject to IRS reporting rules. Gifts of up to $19,000 in cash are exempt from reporting in 2025. Those who have household employees must report cash payments that exceed $2,800 in 2025.
A soft loan is a loan with no interest or a below-market rate of interest. Also known as "soft financing" or "concessional funding," soft loans have lenient terms, such as extended grace periods in which only interest or service charges are due, and interest holidays.
6 Let's say you were giving a loan to a family member for $10,000 to be paid back in one year. You would need to charge the borrower a minimum interest rate of 4.30% for the loan. In other words, you should receive $430 in interest from the loan. In our example above, any rate below 4.30% could trigger a taxable event.
The friend or relative who loaned the money must file a gift tax return for interest-free loans over $17,000. If the loan includes interest, the 'lender' must report what they earn as income. Doesn't help to build credit: Your friend or relative lender will not report your payments to the credit bureaus.
A loan made in writing is generally preferred so there are clear terms of the arrangement (and therefore less chance of such terms being disputed). A gift is made by delivery of the money or property by the giver with an intention to completely dispose of the money or property.
The IRS mandates that any loan between family members be made with a signed written agreement, a fixed repayment schedule, and a minimum interest rate. (The IRS publishes Applicable Federal Rates (AFRs) monthly.)
For 2021, you can forgive up to $15,000 per borrower ($30,000 if your spouse joins in the gift) without paying gift taxes or using any of your lifetime exemption. (These amounts are the same as in 2020.) But you will still have interest income in the year of forgiveness. Forgive (don't forget).
But if the transaction does fall within one of the exceptions and an interest deduction could not have been taken, the value of the interest-free loan would simply be the interest which the borrower would have paid at arm's-length. This gain may be taxed in several ways.
Gift tax limit 2024
The gift tax limit, also known as the gift tax exclusion, is $18,000 for 2024. This amount is the maximum you can give a single person without having to report it to the IRS. For married couples, the limit is $18,000 each, for a total of $36,000.
A loan you make to a loved one might actually be considered a gift if you don't charge enough interest. Therefore, you should understand the potential tax consequences, including applicable federal rates and the proper use of tax forms like Schedule B and Form 709.
Traditionally courts consider the following factors in determining whether an advance is a gift or a loan: (1) whether there was a promissory note or other evidence of indebtedness, (2) whether interest was charged, (3) whether there was security or collateral, (4) whether there was a fixed maturity date, (5) whether a ...
Annual gift tax exclusion
The gift tax limit is $18,000 in 2024 and $19,000 in 2025. Note that this annual exclusion is per gift recipient. So, you could give away the limit to several different people in a single year and still not have to file a gift tax return and possibly pay the gift tax.
Personal loans that truly charge no interest are rare, but there are some lenders that offer them. Some of these lenders include: Universities. Certain universities provide emergency student loans that come with 0.00% APR.
If you decide in your lifetime to write off a loan that you have made you should document and date the agreement to do so as this will convert the loan to a gift at that date. If you survive seven years from the date the loan was written off, then the value will drop out of your estate.
Yes, your parents can gift you $100,000 for a house — but they'll have to file a gift tax return to disclose the gift since it exceeds the IRS exclusion amount of $18,000. Filing a return doesn't necessarily mean they'll automatically have to pay taxes.