Do I need to report to the IRS if I receive an interest free loan from my father oversees?

[user17574520943]

Hi!!

My father is a Spanish citizen residing in Spain and plans to help me buy a house in the US. He plans to loan me more than $100k, which I will pay back at no interest (Spanish Revenue Agency does not tax zero interest family loans).  It appears the Below-Market Loan rules (foregone interest at or above AFR) does not apply when the loan is from a foreign non-US persons but cannot find a lot of information on it.  I am a US Citizen residing in the US. As the borrower, do I need to report this to the IRS and if so, what form would I use?  Thank you.

[Opus 17]

Under US tax law, the lender is required to charge interest, or report imputed income equal to the amount of interest they could have charged.  But that will not apply to your father, of course.

I believe the US tax law would view you as receiving a gift equal to the amount of interest that is not being charged.  Gifts are not normally taxable to the recipient of the gift.  If the gift was more than $18,000 per year, a US taxpayer would be required to report it, but that also would not apply to your father.   You are required to report gifts of more than $100,000 per year, but the loan principal is not the amount of the gift, just the amount of foregone interest, so I don't think this comes into play either.

You could, for tax purposes, treat the entire loan amount as a gift and file form 3520, that might avoid any questions later.  I'm don't think it's required in this case.

https://www.irs.gov/businesses/gifts-from-foreign-person 

[pk]

@user17574520943  very much agreeing with my colleague @Opus 17  for his analysis and suggestions for reporting of this transaction, would just like to add

(a)   assuming the monies would be wired to your  own US bank account, the bank would raise a SAR ( Suspicious Activity Report )  as a matter of course.  Nothing usually happens to these but a record exsits at the US treasury.

(b) By recognizing the whole amount as a "gift" from a foreign person on form 3520 you would  close any questions that may arise  in future.  This also protects you in case  and in the  distant future you are not required to return the amount to the NRA.

(c) While no reporting would be required of you in future when you return the loaned amount, tagged as gift, there should be no  SAR issue  since again a SAR would be raised.  There is nothing wrong or illegal about returning a gift ( never mind the size of the gift ).

For all these reasons I think the  cleanest way to establish a trail is to recognize this as gift by raising the form 3520 --- note this does not go with your return ( see the IRS instructions on form 3520 --->  Form 3520 (Rev. December 2023)   and is to be filed during the year wherein the amount was received.