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Generally, the person who receives the gift or bequest will not have to pay any federal gift tax or estate tax because of it. Also, that person will not have to pay income tax on the value of the gift or inheritance received. The giver is responsible for any tax on the gift.
The gift tax annual exclusion is the maximum amount which a taxpayer can gift each year to any beneficiary without being required to use his or her $1 million lifetime gift exemption amount. If gifts are limited each year to the annual exclusion amount established in the year of the gift, the person making the gift is not required to file a gift tax return, and no gift taxes will be due.
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IRS Publication 950 link to gift tax info:
A below-market loan is a loan on which no interest is charged or on which interest is charged at a rate below the applicable federal rate. A gift or demand loan that is a below-market loan generally is considered an arm's-length transaction in which you, the borrower, are considered as having received both the following.
A loan in exchange for a note that requires the payment of interest at the applicable federal rate.
An additional payment in an amount equal to the forgone interest.
The additional payment is treated as a gift, dividend, contribution to capital, payment of compensation, or other payment, depending on the substance of the transaction.
If you receive a below-market gift loan or demand loan, you are treated as receiving an additional payment (as a gift, dividend, etc.) equal to the forgone interest on the loan. You are then treated as transferring this amount back to the lender as interest. These transfers are considered to occur annually, generally on December 31. If you use the loan proceeds in your trade or business, you can deduct the forgone interest each year as a business interest expense. The lender must report it as interest income.
Before your friend makes this gift loan to you, they need to speak with their financial adviser on all the implications involved.
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