I have a question on a family loan. If it is less than $100K with 1% interest, and you buy a house with it.
What do you need to report as a borrower, and what is the tax consequence?
some of the issues you face.
1)None of the interest would be deductible by you since it seems the house is not security for the loan.
2) since the loan is over $10,000 you are subject to IRC section 7872. It would appear to be a gift loan as defined in IRC 7872(c)(1)(A)
3) slightly different rules apply in the interest rate depending on whether this is a demand or term loan
7872 (f) (2)Applicable Federal rate
(A)Term loans
In the case of any term loan, the applicable Federal rate shall be the applicable Federal rate in effect under section 1274(d) (as of the day on which the loan was made), compounded semiannually.
(B)Demand loans
In the case of a demand loan, the applicable Federal rate shall be the Federal short-term rate in effect under section 1274(d) for the period for which the amount of forgone interest is being determined, compounded semiannually.
4) in either case the applicable federal rate is applied to the applicable balance and interest for the year is calculated and reported as interest income on the lender's return with an exception.
5)
(d)Special rules for gift loans
(1)Limitation on interest accrual for purposes of income taxes where loans do not exceed $100,000
(A)In general
For purposes of subtitle A, in the case of a gift loan directly between individuals, the amount treated as retransferred by the borrower to the lender as of the close of any year shall not exceed the borrower’s net investment income for such year.
(B)Limitation not to apply where one of principal purposes is tax avoidance
Subparagraph (A) shall not apply to any loan the interest arrangements of which have as 1 of their principal purposes the avoidance of any Federal tax.
5)if these gifts along with other gifts between the lender and borrower exceed the annual gift tax exclusion gift tax returns must be filed. Form 709. Turbotax does not do this form. It does not calculate any linitation on reporting due to (d)(1)
