How much should we pay in interest on a "family" loan?

[yoopermom]

We bought a house last November that was a stretch for us. My DSM, who has made a career in a financial field, was so kind as to loan us 30K, with the understanding that when our existing house sold, we would pay her back. (DH and I really hemmed and hawed about this, but she really wanted us to take it.)

It's been a nerve-wracking seven months since, but we finally have a closing date of later this month, hurray!

So now, here's my question. She never asked for a payment along the way, and has said that she doesn't want any interest back, just the original amount (and she is quite wealthy, so this did not affect her living standards in any way). However, DH and I would like to gift her with at least a token amount as a thank you for making it possible for us to buy this house. What would be an appropriate amount for her having lost seven months of interest on 30K? (If it makes a difference, she is VERY conservative, and probably had it in some type of account that would reflect as such.)

We are only breaking even on this home sale, so won't have tons of extra money to throw around, but do want her to know how grateful we are...

Terri

 

[gljvd]

Look at it this way. If she kept it in a bank or a cd she would get 1 to 1.5% at most. So if she isn't expecting extra money back look at something like that. That way it would have been no different to her than it sitting in the bank ?

 

[Ed J]

Family vig is always 3%.

 

[tzeitel]

Could you maybe gift her something other than money? It sounds like she did it because she was happy to help you guys out and did not even think of getting more than what she lent you. If you gave her more than what she lent she might think you see it as a "transaction" and not as something nice she was able to do for you.

 

[disney world dreamer]

no interest!
she said no interest, she doesn't need extra money as you've already told us, i would NEVER expect a family member to pay me back with interest it just seems wrong.i would only want back what i loaned as i'm not trying to make a profit like a company does.

if you ant to show your appreciation do it with an experience not cold hard cash.
for example take her out to dinner or have a spa day.

 

[nalajms]

I would go with the 1% and buy her a gift card or a present for that amount. Her fav restaurant, spa, salon, dept store? Or maybe there's some item she's been waiting to get?

I would not hand her cash because then she would be obligated to file taxes on that and would make things more difficult

 

[yoopermom]

Thanks, y'all, she's just SUCH a generous person (had to list it as a "gift" for the purpose of the bank loan, but obviously we are paying her back!).

If we were to go with 1% would that be $300, is that how interest rate would be computed in this example?

Terri

 

[Marymom]

She would feel more appreciated if you would ask her over for dinner in your new house and thank her again for the loan while you pay her the original 30,000. It was a gift given in love, don't make it a business transaction.

 

[MillauFr]

She would feel more appreciated if you would ask her over for dinner in your new house and thank her again for the loan while you pay her the original 30,000. It was a gift given in love, don't make it a business transaction.

Agreed

 

[seashoreCM]

Interest must be charged otherwise the lender will have to pay tax on a portion of the principal (loan amount) as it is paid back.

I don't have on hand the exact minimum interest rate required. It varies from year to year although I believe that a loan does not have to be adjustable rate to prevent this problem..

In addition, if no interest is charged and no loan documents are drawn up and signed and the borrower does not make payments regularly then the entire transaction may be regarded as a gift by the IRS and this may cause problems with inheritance taxes and gift taxes down the road. For an older lender, the gift may cause problems with being eligible for subsidized nursing home care.

 

[kymom99]

I agree and would certainly do something nice in return.

 

[GAN]

Interest must be charged otherwise the lender will have to pay tax on a portion of the principal (loan amount) as it is paid back.

I don't have on hand the exact minimum interest rate required. It varies from year to year although I believe that a loan does not have to be adjustable rate to prevent this problem..

In addition, if no interest is charged and no loan documents are drawn up and signed and the borrower does not make payments regularly then the entire transaction may be regarded as a gift by the IRS and this may cause problems with inheritance taxes and gift taxes down the road. For an older lender, the gift may cause problems with being eligible for subsidized nursing home care.

Really? I see where you're coming from, but it doesn't seem right. So if I let my friend borrow $10k, and he uses it to carry part of a down payment on a house -then subsequently gives me my money back ...I pay tax on that? Not that I doubt you, but I certainly wouldn't claim it(or would have ever known to). They woke up with $10k under the pillow, miraculously a month later the same thing happened to me.

 

[MomToOne]

In our family, we always pay about the same rate as you would have paid if you took out a bank loan. The "break" the relative is giving you is the joy of not having to qualify for that loan, not in the interest rate.

But we treat any money transaction like this as business. We've found there is always someone getting their nose bent if we treat it any other way (either the lender, the lendee or just someone else in the family that feels the lendee is taking advantage) I get that other families might not works this way, but it's just better for us. Of course, this is established BEFORE the money changes hands. In your case, since it wasn't discussed, I would probably just repay the original amount? I'm thinking nothing else is expected, or even wanted.

 

[supersnoop]

Really? I see where you're coming from, but it doesn't seem right. So if I let my friend borrow $10k, and he uses it to carry part of a down payment on a house -then subsequently gives me my money back ...I pay tax on that? Not that I doubt you, but I certainly wouldn't claim it(or would have ever known to). They woke up with $10k under the pillow, miraculously a month later the same thing happened to me.

Essentially, you earned the interested and then gave him that back (the interest) as a gift. It's called "imputed interest."

It gets a little easier when dealing with the amounts in your example; it's more important for larger amounts. You could give anyone $14,000 without being subject to the gift tax. But when someone gives you more than that, either they have gift-tax consequences, or you have to pay them interest. If you don't pay interest, then that is the "gift." And it's income to them.

 

[nugov2]

I would go with the 1% and buy her a gift card or a present for that amount. Her fav restaurant, spa, salon, dept store? Or maybe there's some item she's been waiting to get?

I would not hand her cash because then she would be obligated to file taxes on that and would make things more difficult

I'm pretty sure she wouldn't have to file a 1% gift on her taxes. We are talking about $300

OP I like the gift card idea or a really nice dinner. She won't want the interest.

 

[tvguy]

Interest must be charged otherwise the lender will have to pay tax on a portion of the principal (loan amount) as it is paid back.

I don't have on hand the exact minimum interest rate required. It varies from year to year although I believe that a loan does not have to be adjustable rate to prevent this problem..

In addition, if no interest is charged and no loan documents are drawn up and signed and the borrower does not make payments regularly then the entire transaction may be regarded as a gift by the IRS and this may cause problems with inheritance taxes and gift taxes down the road. For an older lender, the gift may cause problems with being eligible for subsidized nursing home care.

I think you are absolutely factually correct. I also think that very few people ever follow that law. And I also think the dollar amount of any tax would be soooo low that the IRS would never bother to go after it by itself. They might uncover it during an audit triggered by other circumstances and demand payment, but otherwise, not worth their time. Apparently, they are pretty much ignoring a lot of folks that owe less than $1 million. Yes, $1 million. http://www.forbes.com/sites/irswatc...we-under-1-million-the-irs-may-not-visit-you/

 

[Thing 1]

I would invite her to a nice dinner and give the money back and thank her from your heart. She asked for no interest and trying to undo that takes away the joy of giving. So many people never return gifted family money. Our rule is to never lend money we can not afford to give away. It has never really ever occurred to me to get interest. Pay it forward someday.

 

[sprousehouse]

I would think she could count it as a "gift" for tax purposes. Federal gift limits are $14K per person, so technically she could give you, your husband and any children that amount annually without a tax penalty. Since you want to pay her back, the same would apply in reverse with your individual family members gifting to her. My in-laws have done this with my BIL & SIL to help them buy houses. Instead of gifting them each year they forgive a portion of the loan.

I don't think you should pay interest as that wasn't what was agreed to. My in-laws are very secure financially and I have come to realize that their generosity really brings them happiness. They appreciate more personal gestures. I think inviting her over to dinner, having something made for her or maybe the two of you doing a spa day together would be more appropriate ways to thank her.

 

[morgan98]

I think you are absolutely factually correct. I also think that very few people ever follow that law. And I also think the dollar amount of any tax would be soooo low that the IRS would never bother to go after it by itself. They might uncover it during an audit triggered by other circumstances and demand payment, but otherwise, not worth their time. Apparently, they are pretty much ignoring a lot of folks that owe less than $1 million. Yes, $1 million. http://www.forbes.com/sites/irswatc...we-under-1-million-the-irs-may-not-visit-you/

Yes, there is tax code about imputed interest. The fact that people really think it is that big of a deal for $30,000 that is borrowed for 7 months is taking the letter of the law to an extreme (and I am a CPA). I mean 3% on $30,000 is a total of $525 and they were probably not earning anywhere near 3% from the bank.

I would honestly not give a second thought to tax ramifications on such an amount.

OP, invite them to dinner or buy them a generous gift card to a fancy restaurant in a hand written thank you note. I am sure they would be pleased with this.

 

[yoopermom]

Thanks, everyone. We're really not worried about the tax implications (but would split it up between her and my DF, or between years or whatever, if that's what she wanted). It's just REALLY hard just to say *thank you* for such an extremely generous loan. She's also financing DS's last two years of college, so we owe her so very much (figuratively, in that case, since it's his "early inheritance"...).

Terri