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

[smiths02]

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.

But anyone person can give any other person up to $14k a year with no tax implication.

 

[madhavok]

I'd go for a gift value 1%. A family vig of 3% is high, at least I think. In my case 3% would be just barely lower than the institution bank gave me for my 30 year mortgage.

 

[kymom99]

Sounds like your dad found himself a winner! You are lucky to have this lady in your life.

 

[supersnoop]

The tax rules only apply to the lender. Since this sounds like a loan for less than 3 years, the applicable rate would be 0.43%. So, if you paid her off in seven months, then she should claim about $75 of interest income, and would count that $75 against the annual gift limit.

 

[MinnieForMe]

I would do something to show her how special she is in your life. I would not pay her interest. She wanted to help you out and found joy in it. I agree with the poster who said a nice dinner at your house, a card and the original amount due is more than enough. I would NEVER take interest from a family member.

 

[Judique]

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

It's listed as a 'gift' for the purpose of the bank loan - meaning the money you used as down payment and closing costs, right?

So it isn't actually a loan, because you probably couldn't have taken a loan out for this money.

Now you are going to 'gift' it back to your DSM once you collect on your house sale. You can't actually 'pay' it back, as that would be a conflict.

Do dinner or the Spa day - you will complicate this even further with even bringing up the subject of interest. Write a nice note, give flowers, whatever. Just don't offer interest on this 'gift' that wasn't legally a gift as intended in the real estate transaction.

 

[ExExPirateShopGirl]

I agree with most everyone here. A woman who lends you money to buy a house she knows you want and would be nice for your family (not to mention financing an education which could help your son on his way to financial freedom, too) is NOT interested in interest. Pun intended. Do as she asked and repay the money, every penny, within a few days of closing and ask her over for her favorite meal, or treat her out. And bring her a lovely bouquet of her favorite flowers at the same time.

 

[ceecee]

Do something nice for her, a spa day and a nice lunch would be a treat for both of you and she would probably like spending time with you.

 

[supersnoop]

It's listed as a 'gift' for the purpose of the bank loan - meaning the money you used as down payment and closing costs, right?

So it isn't actually a loan, because you probably couldn't have taken a loan out for this money.

Now you are going to 'gift' it back to your DSM once you collect on your house sale. You can't actually 'pay' it back, as that would be a conflict.

Do dinner or the Spa day - you will complicate this even further with even bringing up the subject of interest. Write a nice note, give flowers, whatever. Just don't offer interest on this 'gift' that wasn't legally a gift as intended in the real estate transaction.

Let's not start using words in "quotes" to advocate mortgage fraud. Substance rules over form.

 

[hsmamato2]

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!

 

[Judique]

Let's not start using words in "quotes" to advocate mortgage fraud. Substance rules over form.

????

At no point am I advocating mortgage fraud. Why would you go there? That's not part of the question. The OP simply wants to know how to show appreciation to a DSM and most are suggesting that money is not the best way.

But I can tell you that I fully understand that gifted money in conjunction with a mortgage does not suggest interest or paying back the gift.

Not sure where you are trying to go with this. I like to use 'quotes'.

'OP' - as suggested by many, do 'dinner' or 'spa' or 'flowers' or 'nice hand written note' - all 'great' ideas.

 

[supersnoop]

At no point am I advocating mortgage fraud. Why would you go there? That's not part of the question. The OP simply wants to know how to show appreciation to a DSM and most are suggesting that money is not the best way.

It's listed as a 'gift' for the purpose of the bank loan
...
Now you are going to 'gift' it back to your DSM once you collect on your house sale. You can't actually 'pay' it back, as that would be a conflict.

Labeling it a "gift" for the purposes of obtaining the mortgage, and then making an equal "gift" back is mortgage fraud. Interest is irrelevant. Substance, or "intent," is what matters.

I'm pretty sure you're the on one who suggested calling the original loan a "gift." In the rest of the discussion, only the imputed interest was referred to as a "gift."

 

[Judique]

Labeling it a "gift" for the purposes of obtaining the mortgage, and then making an equal "gift" back is mortgage fraud. Interest is irrelevant. Substance, or "intent," is what matters.

I'm pretty sure you're the on one who suggested calling the original loan a "gift." In the rest of the discussion, only the imputed interest was referred to as a "gift."

Go reread post number 7.

 

[morgan98]

Labeling it a "gift" for the purposes of obtaining the mortgage, and then making an equal "gift" back is mortgage fraud. Interest is irrelevant. Substance, or "intent," is what matters.

I'm pretty sure you're the on one who suggested calling the original loan a "gift." In the rest of the discussion, only the imputed interest was referred to as a "gift."

You may "technically" be correct. However, to try to turn the amount of $$$ we are talking about here, casually between family members really is stretching it. Even if you are talking abut $500 of interest at a 35% rate, we are talking less than $200. Really??????

 

[luvdisney00]

I would not try to pay interest as I think it could be viewed as insulting. If I lent my child and their spouse money to buy a house and they paid it back with interest I would feel kind of weird about it. I think if I were you I'd buy a nice thank you gift and I wouldn't do a GC for someone who has a lot of money, but something nice that she could enjoy. Another thought would be an experience that you could have together like tickets to a play or a game or something like that. Have her over to dinner at your new house to present the gift.

 

[Kingdome8]

Go with dinner or a gift card. If you give 1percent interest that's way better then any bank could lend for that time period. Doesn't sound like she's looking to profit. Sounds just like a good friend.

 

[seashoreCM]

If it is listed as a gift for the purposes of the mortgage loan application then either it is a gift or mortgage fraud took place.

Nothing forbids "paying her back after the closing" but that would be regarded as a gift also.

No income tax on imputed interest would be due for either of those transactions.

In this example, if you personally chose to "pay it back" half and half in two calendar years respectively then $14,000. of each "half" would not incur a gift tax given the current gift tax exclusion. If half of it was from you and half from DH all in the same calendar year then $14,000 of each half would also not incur a gift tax.

For those eavesdropping, the original gift would affect that donor's eligibility for subsidized nursing home care and the "payback gift" will aftect that donor's eligibility for subsidized nursing home care, if either of these situations is applicable. Gifts under $14,000 within the 5 year lookback period must be included when applying for such subsidies.

Although not common, IRS auditors can call attention to amounts in the $30,000 range that change hands as a lump sum. Both the party who paid it and the party who received it would have to explain what the transaction was for and problems will occur if one party said it was a loan and the other said it was a gift or if conflicting documents were found.

 

[plummer925]

No interest. But definitely get her a nice gift. A piece of jewelry if she wears it (a necklace from Tiffany's would be around $300 - imagine her delight!). A lovely dinner out. Some lobsters. Something she would not indulge in since she is conservative

 

[SweetPeasMom2]

I don't have any clue as to the tax implications but wanted the OP to be careful about giving this money back and how it is done. We are closing on our house tomorrow. Because part of the funds were held in a savings account in my name only and the earnest money went through my account I use for my business, I have to sign a gift letter for both amounts to my husband (my name is not on the loan). In the letter, it states I certify that there is no repayment expected or implied on the Gift, either in the form of cash or future services. If you guys had to sign one of these, just be careful giving it back.

 

[amcnj]

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

Don't forget the interest rates being tossed around are annual rates. So for 7 months it would 7/12's of the annual amount (ignoring compounding).