I have a DIFFERENT answer.
Above, the following is stated:
"Q: Do I have to pay income tax on the monthly payment if I charge no interest?
A: Yes. Even if you do not charge interest, the monthly payment is income to you and is required to be reported.
That is NOT correct. The repayment of loan principal is NOT income.
You did not take a deduction
when you lent it and the person to whom you lent did not recognize income (because they have to pay it back).
However, on the following I do agree, in part (that interest must be charged) but from there forward, I again disagree.
IRS calls interest free loans (regardless of whether it's family or not) below market loans:
You can read more about that here, in IRS Publication 550:
For a TERM loan such as this, the lender is treated as transferring an additional lump-sum cash payment to the borrower (as a dividend
, contribution to capital, etc.) on the date the loan is made.
The amount of this payment is the amount of the loan minus the present value, at the applicable federal
rate, of all payments due under the loan. An equal amount is treated as original issue discount (OID)
The lender must report the annual part of the OID as interest income. The borrower may be able to deduct the OID as interest expense.
The way to pre-empt this, is to charge an interest rate that is in line with current market rates and report ONLY THE INTEREST as income.
IRS' applicable Federal Rate (AFR) is one way to do this, (you can see that here: http://apps.irs.gov/app/picklist/list/federalRates.html ) but this is what IRS calls a facts and circumstances test. It is only necessary that you can show that the interest rate you charged is in line with current market rates at the time the loan was made.
And finally, your daughter, if this is her primary residence, or second home, can deduct the interest.
But, again, ONLY the interest rate you charge is income to you ... NOT the entire loan repayment.
let me know if you have questions...