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Robin D.
Robin D., Senior Tax Advisor 4
Category: Tax
Satisfied Customers: 13339
Experience:  15years with H & R Block. Divisional leader, Instructor
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I want to loan my friend money in order to purchase a house.

Customer Question

I want to loan my friend money in order to purchase a house. Can I provide him with an interest free note? If so, what needs to be disclosed to the IRS, if anything?
Submitted: 3 years ago.
Category: Tax
Expert:  Robin D. replied 3 years ago.

Robin D :

Hello and thank you for using Just Answer,
The IRS does not believe in interest free loans. The IRS could apply what is called imput interest and that amount would be taxable to you even if your friend did not pay you interest.

Robin D :

There are exceptions.

Robin D :

In general, the below-market rules do not apply to gift loans between individuals when the aggregate outstanding amount of loans between these individuals does not exceed $10,000.

Robin D :

So if you loan your friend $10,000 or less the IRS would not apply interest because the purchase would be for a home and not any income producing property by your friend.

Robin D :

It is wise for the lender (you) to have a written note indicating the loan amount, the payment date, the stated rate of interest, and any collateral or security. You should use the AFR interest rate published on the IRS site.

Robin D :

Here is a link to an easier to read rate schedule for the AFR (which stands for Applicable Federal Rate)
http://www.afrrates.com/

Robin D :

Please let me know if you need more information.

Customer: replied 3 years ago.

I understand the exceptions but if I give him a loan, what do I have to provide/report to the IRS? Just the imputed interest?

Expert:  Robin D. replied 3 years ago.

You will include the interest on your tax return each year as income. Schedule B is used to report interest income. You would not need to send in any copies of your agreement unless the IRS requested a copy.

Customer: replied 3 years ago.

Okay and you mentioned the $10,000 gift. If my friend and his wife participated, could they gift $20,000? Are there any tax implications to either of the parties involved?

Expert:  Robin D. replied 3 years ago.

The $10,000 loan could be made to each of them resulting in a total loan of $20,000 where no interest would be imput. This is not a gift in the same way a limit applies to a regular gift (no repayment expected). If this were a true gift then you could give the wife $14,000 and the husband $14,000 ( $28,000 total) and no reporting would be required because it would be under the yearly limit on gifts.
The Gift Tax and the "Gift" loan are not the same.
A gift implies no payment is expected and a loan means you expect to be repaid.

I have to log off now so if you have any more questions please just wait till tomorrow.

If you do not I thank you in advance for a positive rating.

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