Deferred interest

[Rhkjr]

Is it possible to issue a family member a secured loan with deferred interest payable when the house is sold?  Or because there wasn’t any payments being received would it be looked at as a gift?  If it is possible, how would it be recorded for taxes?

[pk]

@Rhkjr 

(a) For US Tax purposes, any actual earned interest ( and received ) is taxable income to the lender ---the terms i.e. the repayment schedule, the interest rate etc. are all negotiable  and part of the agreement.  Just to note , however, the lender has to charge  fair interest ( generally in line with the local market conditions )   and especially  when not at arms-length /  between relatives the charged interest rate should meet fed rates published by the IRS ( else  could be interpreted as gift).  I am assuming here  that this is a formal agreement and under the eyes/ advice of a legal/ financial professional.

(b) What do you mean by "secured" --  by the "house " being sold or what ?  Just curious , has no tax implications. 

(c) what are you trying to achieve ?   I am always leery of formal agreements between family members  because of risk of "losing" even when "winning".  I would much rather be a surety of a commercial  secured loan between the relative and a bank/lender.  IMHO

[Rhkjr]

I appreciate the feedback.  My in laws have a mortgage on their house and have also accumulated a lot of other debt ( credit cards, loans, etc).  They can afford the mortgage but not the monthly payments of the other debt.  Their credit score isn’t good and won’t get approved for any loans.   The idea was my wife and I issue a loan to them with deferred interest secured by their house which would get paid back when the house was sold.  Definitely not the most ideal situation but just trying to keep them in their house.  

[pk]

@Rhkjr , thank you for sharing.  Yes , you must do what you have to do.

Please consider using legal help  so your interests  ( both as inheritor and a creditor ) are preserved.

If you choose to donate the interest earned  ( or imputed) to your relatives, then that probably would be under the free yearly amount of gift per donor per donee --- thus no reporting and no tax increase for you.  If that is what you choose to do.

Good Luck.

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