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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 10476
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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My wife and I wish to sell our small farm and house to our

Customer Question

My wife and I wish to sell our small farm and house to our daughter. We have set a fair price and divided it into yearly payments, however we are being told by one adviser that we must charge charge interest. Another adviser is saying that we do not have to charge interest.
This is the first time that we have ever sold a home and we do not wish to charge interest.
Can we sell this farm along with our house and not charge interest.
Although we will live in the house, it will be attached to the farm sale-we will only have life time residenccy. Ernie and Sue Meadows
Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.

Good Morning,

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Yes, you do have to charge interest.

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If you don't IRS will call this a "below-market" loan and do what's called "impute" interest (charge you tax on the federal rate as if you HAD received the interest rate anyway).

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Where people really get stick with this is when they don't do so, IRS gets wind (through audit of yours or even the audit of others, say your daughter) and then they have late payment, underpayment, penalties ... and interest as well.

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Expert:  Lane replied 1 year ago.

The rate you need to charge is at least the Applicable Federal Rate (AFR).

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You can see those here: http://apps.irs.gov/app/picklist/list/federalRates.html

Expert:  Lane replied 1 year ago.

The IRS isn’t concerned with most personal loans to your son or daughter. They don’t care how often you make loans, whether you charge interest, or if you ever get paid back.

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However, there are exceptions.

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From an excellent article by intuit (the TurboTax people)

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Interest-free loans

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If you loan a significant amount of money to your kids, say, enough to buy a house, it’s important to charge interest.

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If you don’t, the IRS can determine that interest you should have charged was a gift. (In addition, the borrower may be more motivated to actually pay you back if there’s interest involved!)

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The rate of interest on the loan must be at least as high as the minimum interest rates set by the IRS. [That's the AFR I showed you]

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You don’t have to worry about skipped interest being subject to gift tax rules unless the interest you should have charged, combined with other gifts to the same person, exceeds $14,000 in 2015

Expert:  Lane replied 1 year ago.

... and here's the actual RS guidance on this: http://www.irs.gov/publications/p550/ch01.html#en_US_2014_publink10009882

Expert:  Lane replied 1 year ago.

Finally, as you can see from looking at the table, this is an excellent time (interest rates being as low as they are) to loan her the money as the AFR is now at 2.55%.

Expert:  Lane replied 1 year ago.

Hope this helps

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let me know if you have questions

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Lane

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If this HAS helped, and you don't have additional questions on this, I'd appreciate a positive rating (by clicking the stars or smiley faces on your screen) ... that's the only way I'll be credited for the work here.
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