Can I loan a family member a large amount of money without charging interest or reporting it to the IRS?

[jmpeacock-sbcglo]

Or, should I give them the money as a gift, and. then they pay me back after they sell their house?

[xmasbaby0]

If you expect to be paid back someday, the money is not a gift.  Before you go forward -- decide -- are you actually giving the money to the family member with no expectation of repayment, or are you loaning them the money and expecting to be paid back?   

[jmpeacock-sbcglo]

Yes, they are going to pay us back after they sell their house - probably within tow months. This is a bridge loan to help them with current expenses.  It's $20k to them to help them with bills...they sell their house and pay us back.  Is this something we need to report?  Or, can we "gift" them $10k and $10k each... then they gift us back the $20k after they sell their house?

[xmasbaby0]

No.   A "gift" does not get paid back.   A gift has no strings attached and you do not get paid back for a gift.  You are loaning money if you are being repaid.   Claiming that you gave a gift and that they gave you an identical  gift a couple of months later to skirt the tax laws would be dishonest.   You are loaning money, and there is imputed interest when they pay it back to you.   You will report that interest as income on your own tax return as if you received a 1099INT.

[Mike9241]

IRC 7872 is a provision in the U.S. tax code that addresses below-market loans, including those made within families. Let’s break down how it affects family loans:

Gift Loans and Demand Loans:
If a family member provides a below-market loan (one with an interest rate below the prescribed market rate), the forgone interest (the difference between the market rate and the actual rate) is treated as follows:
The lender is considered to have transferred (gifted)  the forgone interest to the borrower (may require filing gift tax return if the interest is high enough).
The borrower is then deemed to have retransferred the same amount back to the lender as interest (again a gift tax return may be required and the lnder has interest income even though they receive no cash) .
This ensures that the lender doesn’t give away the use of their money without tax consequences1.
Other Below-Market Loans:
For loans that don’t fall under the gift or demand loan category, the rules are slightly different.
The lender is treated as having transferred cash to the borrower equal to the excess of the loan amount over the present value of all required payments under the loan terms.
Such loans are considered to have original issue discount (OID) equal to this excess amount.
OID is additional to any other original issue discount on the loan1.
Applicability:
IRC 7872 applies to various types of below-market loans, including:
Gift loans
Compensation-related loans between employers and employees or independent contractors and service recipients
Corporation-shareholder loans
Tax avoidance loans (where the interest arrangements aim to avoid federal tax)
Other below-market loans as defined by regulations1.
Minimum Interest Requirement:
To prevent tax avoidance, IRC 7872 requires that loans between related parties (including family members) bear a minimum amount of interest based on applicable federal rates (AFRs).
This rule applies to loans usually exceeding $10,000.
In summary, if you’re providing a family loan without interest, be aware of the IRC 7872 rules to ensure compliance with tax regulations. Always consult a tax professional for specific advice related to your situation

if you make it a gift, there may be the need to file a gift tax return. as a true gift there would be no interest to report.  A "gift" is not a "gift" if it is repaid if the "gift" was repaid the IRS would likely view the gift as a sham transaction which can have severe adverse tax consequences for both parties. 

not knowing your particular circumstances consult with a tax pro.

[jmpeacock-sbcglo]

Thank you - I don't want to skirt any tax issues. Can I loan my FIL $10k and my MIL $10k?  There is no reporting necessary in that case, correct? Then, when they sell their house, they could gift us $20k back in total... $10k from FIL and $10k from MIL? Or, would that still raise red flags?

[pk]

@jmpeacock-sbcglo  Agreeing with my colleagues  ( @xmasbaby0  and @Mike9241 )  in general and in abstract, and looking at the actual amounts that you are proposing to lend to another  & related family member  I think this is  correct  but too much about nothing.

(a) by  cross gifting ( i.e.  A gives a gift of $XX,XXX to B and then  B returns the favor  by gifting the same amount to A at a later date)   an audit happens  for some reason will definitely raise questions  as to why someone would go to all that trouble --- I am assuming here the actual gift amount is  $20,000

(b)  by lending monies  ( again the same 20,000)  to someone even at arms length and for a period of say three months  , really is a gift of the interest that could have been earned  in those three months.   If I assume a 4.5%  , then the actual amount of the gift  is   roughly $225     (  0.01 X 20,000 = 225 , where  .01 is the rough & allocated  interest rate for 3 months and the principle is 20,000 ).  This is amount of interest income being gifted -- far below the $18,000 per year , per donor, per recipient amount  for 2024.

Therefore  I suggest the KISS principle  here.

Does this make sense  or am I in the wide left field ?

[jmpeacock-sbcglo]

Thank you - If we do this as a proper intrafamily loan, with interest, how do I go about that? I there a form? Do I need to handle all paperwork before initiating any kind of a transfer? 

[Opus 17]

Quoting:

If a family member provides a below-market loan (one with an interest rate below the prescribed market rate), the forgone interest (the difference between the market rate and the actual rate) is treated as follows:
The lender is considered to have transferred (gifted)  the forgone interest to the borrower (may require filing gift tax return if the interest is high enough).
The borrower is then deemed to have retransferred the same amount back to the lender as interest.

What this means in (hopefully) simpler language, is that if you do not charge interest, you must still report taxable income equal to the interest you would have received if you had charged a market rate.  The applicable federal rates are here.

https://www.irs.gov/applicable-federal-rates

For a short term loan made in May 2024, the minimum interest rate (when interest is calculated monthly) is 4.86%.

That means that if you loan your mother in law $10,000, you must report $10,000 x 4.86% ÷ 12 = $40 per month of interest income, regardless of whether they actually pay interest.  If you charged them $10 per month interest, you must still report $40 (the 4.86% rate).  If you charged them more than 4.86%, you would report the interest that you actually received.

Likewise if you loan your father in law $10,000, the same calculation applies.  It also doesn't matter if you loan $10,000 each or $20,000 to one of them, the calculation is the same.

You can report this as interest income on your 2024 tax return at the end of the year, even though your relatives do not give you a 1099-INT form. 

The gift portion of the rule is that if you make the loan interest-free, you are treating as gifting them $40 per month each, or $80 per month total.  That is not large enough to require reporting on a gift tax return, so for practical purposes, you can ignore that side of the situation. 

[Opus 17]

@pk 

The foregone interest ($80 per month on $20,000) is a gift from the lender to the borrower, that comes back as taxable interest.  While the gift from the lender to the borrower is certainly below the gift reporting threshold, the taxable interest (imputed interest income) to the lender is required to be reported by regulation.  

Do people do this all the time without reporting?  Probably.  But I won't tell the taxpayer to ignore the requirement to report the interest.  That's their risk to take if they choose. 

[tagteam]

If the loan is actually $10,000, then as @Mike9241 indicated earlier, the de minimis exception in Section 7872 applies.

See https://www.law.cornell.edu/uscode/text/26/7872

@jmpeacock-sbcglo 

[Llkatz]

I have a question related to this subject. If my business borrow money from family member, do I use simple interest or compound interest to calculate the interest owe to my family member that is required by the IRS?