No, the principal that he pays back is not taxable; however, 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.
- Therefore, you will have to pay taxes on the fair market rate, even though your son did not pay any interest.
- You will have reportable income, but it will not be earned income.
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