What is the best way to file money gifted for a house down payment?

[logan_h]

me and my fiancé are in the process of buying a house and my soon to father in law offered to help with the down payment. He offered to give us $120,000 to use for the down payment that we could pay him back for plus a small amount so that we do not have to pay interest with a loan from a bank. I am wondering what the best way to go about this so that my father in law does not have to pay a large amount of taxes. Should we file the money as a gift or write it as a loan we will pay back or is there a third option I am not aware of? Just looking for the best way to go about this from a tax stand point.

[rjs]

Based on your description it's not a gift, it's a loan, since you are expected to pay it back.

You do not report the loan on your tax return. It has no effect on your taxes. There is nothing you can claim as a deduction.

The "small amount" additional that you pay back is income to your father-in-law. He has to report it as interest income on his tax return for the year that you pay it. There is a minimum interest rate, called the Applicable Federal Rate, that he is assumed to have earned, even if you do not actually pay that much. If you pay less than the minimum rate he has to report interest income as if you paid the minimum rate. See IRS Tax Rules for Imputed Interest.