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Started By
Message
Tax consequences of loan to family
Posted on 4/9/16 at 9:29 am
Posted on 4/9/16 at 9:29 am
Hi, I've been very impressed by the knowledge on this board and am hoping to get some advice.
Short of it is, my wife's cousin is asking to borrow about $30k for a few months so that they'll have enough for a downpayment on a new house and to pay their taxes. What are the tax consequences or considerations in providing that loan?
Long story: wife and her cousin grew up together and are very close. The cousin and her husband are good friends, stand-up people, both well-employed. The cousin herself is a dermatologist, but only out of residency for about 1.5 years, and on maternity leave until May. Ultimately, I have no worries about getting paid back. My limited research indicates that we need to structure it as a loan or else be subject to a gift tax. It seems that we need to use a minimum federal interest rate, whatever that is.
Thanks for any advice you guys may have.
Short of it is, my wife's cousin is asking to borrow about $30k for a few months so that they'll have enough for a downpayment on a new house and to pay their taxes. What are the tax consequences or considerations in providing that loan?
Long story: wife and her cousin grew up together and are very close. The cousin and her husband are good friends, stand-up people, both well-employed. The cousin herself is a dermatologist, but only out of residency for about 1.5 years, and on maternity leave until May. Ultimately, I have no worries about getting paid back. My limited research indicates that we need to structure it as a loan or else be subject to a gift tax. It seems that we need to use a minimum federal interest rate, whatever that is.
Thanks for any advice you guys may have.
3
Posted on 4/9/16 at 9:43 am to pongze
You're correct. Draw up loan documents and charge them a reasonable interest rate. You'll also need to report the interest income on your tax return.
You could actually "loan" them the money and keep it under the gift tax threshold. You and your wife get the exclusion amount, which I think was $14,000 for 2015. So you could "gift" them $28,000 with no tax consequences.
You could actually "loan" them the money and keep it under the gift tax threshold. You and your wife get the exclusion amount, which I think was $14,000 for 2015. So you could "gift" them $28,000 with no tax consequences.
Posted on 4/9/16 at 9:52 am to pongze
You could "gift" them each 14K and your wife could "gift" them each 14K.
If you really need to be paid back, draw up loan papers. It has to be customary rates I think.
LINK
Gift splitting. If the decedent or his or her spouse made a gift to a third party, the gift can be considered as made one-half by the decedent and one-half by the decedent’s spouse. This is known as gift splitting. Both spouses must agree to split the gift and in the case of a deceased spouse, the personal representative will act on behalf of the decedent. If there is consent to split the gift, both spouses can apply the annual exclusion to one-half of the gift. For gifts made in 2015, gift splitting allows married couples to give up to $28,000 to a person without making a taxable gift. If a gift is split, both spouses must file a gift tax return to show an agreement to use gift splitting. Form 709 must be filed even if half of the split gift is less than the annual exclusion.
Example. Harold and his wife, Helen, agreed to split the gifts that they made during 2015. Harold gave his nephew, George, $21,000, and Helen gave her niece, Gina, $18,000. Although each gift is more than the annual exclusion ($14,000), by gift splitting they made these gifts without making a taxable gift. Harold’s gift to George is treated as one-half ($10,500) from Harold and one-half ($10,500) from Helen. Helen’s gift to Gina is also treated as one-half ($9,000) from Helen and one-half ($9,000) from Harold. In each case, because one-half of the split gift is not more than the annual exclusion, it is not a taxable gift. However, each of them must file a gift tax return.
If you really need to be paid back, draw up loan papers. It has to be customary rates I think.
LINK
Gift splitting. If the decedent or his or her spouse made a gift to a third party, the gift can be considered as made one-half by the decedent and one-half by the decedent’s spouse. This is known as gift splitting. Both spouses must agree to split the gift and in the case of a deceased spouse, the personal representative will act on behalf of the decedent. If there is consent to split the gift, both spouses can apply the annual exclusion to one-half of the gift. For gifts made in 2015, gift splitting allows married couples to give up to $28,000 to a person without making a taxable gift. If a gift is split, both spouses must file a gift tax return to show an agreement to use gift splitting. Form 709 must be filed even if half of the split gift is less than the annual exclusion.
Example. Harold and his wife, Helen, agreed to split the gifts that they made during 2015. Harold gave his nephew, George, $21,000, and Helen gave her niece, Gina, $18,000. Although each gift is more than the annual exclusion ($14,000), by gift splitting they made these gifts without making a taxable gift. Harold’s gift to George is treated as one-half ($10,500) from Harold and one-half ($10,500) from Helen. Helen’s gift to Gina is also treated as one-half ($9,000) from Helen and one-half ($9,000) from Harold. In each case, because one-half of the split gift is not more than the annual exclusion, it is not a taxable gift. However, each of them must file a gift tax return.
This post was edited on 4/9/16 at 9:58 am
Posted on 4/9/16 at 10:39 am to The Spleen
quote:
So you could "gift" them $28,000 with no tax consequences.
Could gift both the cousin and her husband 28,000 each if you need the amount to be > 30k.
Posted on 4/9/16 at 10:42 am to pongze
quote:
An ambiguous loan can also ruin your relationship with the Internal Revenue Service, which might argue the loan is really a gift, possibly subject to gift tax. The key to avoiding either family or tax trouble is to put things in writing and, in most cases, to charge your kids a minimum IRS-set rate of interest. The interest they pay is taxable income to you.
quote:
If the IRS ever does scrutinize the loan, you should be ready to show that the child had a realistic chance of repaying the money and that you were ready to collect in the case of a default.
LINK
This post was edited on 4/9/16 at 10:48 am
Posted on 4/9/16 at 11:08 am to TheOcean
quote:
Could gift both the cousin and her husband 28,000 each if you need the amount to be > 30k
No, it's based on the giver of the gift, and each giver has a $14,000 exclusion. So the OP and his wife could each give $14,000 with no tax consequences.
Given the facts though, I'd just treat it as a loan, draw up papers, and report the interest on the tax return. Sounds like it'll be paid back pretty quickly so the interest wouldn't be that much, and it'd keep the IRS off your back.
Posted on 4/9/16 at 11:15 am to The Spleen
quote:
No, it's based on the giver of the gift, and each giver has a $14,000 exclusion. So the OP and his wife could each give $14,000 with no tax consequences.
We're saying the same thing
OP could give a $14k gift to the cousin and her husband and so could OP's wife. $56k total.
Posted on 4/9/16 at 12:13 pm to heldmail
would the receiver of said "gift" need to report it as taxable income?
Posted on 4/9/16 at 12:21 pm to dantes69
Gift tax is paid by the donor unless the donor fails to pay it. The donor would be subject to the gift tax if the gift exceeds both the yearly and lifetime exclusions.
This post was edited on 4/9/16 at 12:21 pm
Posted on 4/9/16 at 12:27 pm to TheOcean
Indeed. I misunderstood your question.
OP, forget all this gift tax talk. If there's the expectation on both sides for it to be paid back, treat it as a loan. It's the proper way to handle it, and I shouldn't have brought up the gift option.
OP, forget all this gift tax talk. If there's the expectation on both sides for it to be paid back, treat it as a loan. It's the proper way to handle it, and I shouldn't have brought up the gift option.
Posted on 4/9/16 at 3:43 pm to The Spleen
Thanks all for the replies. Thanks for addressing the gift option as well, because I was wondering about that as well. I appreciate you guys.
Posted on 4/9/16 at 6:38 pm to pongze
The mortgage lender is not going to be happy about using a loan to pay the down payment on the house. I'm not a banker but I do know that my wife and I used a trust dividend as part of our down payment and it took the idiots over a month to straighten out it wasn't a loan. The mortgage company prefers to be the primary loan, and I'm guessing many won't lend to them if their down payment is a loan. They have to sign off it was not.
Personally, I would never loan money to family. I'd gift it to them with no expectation to get it back, if they do pay you back it's a bonus. If they don't pay you back, is it really worth losing your relationship with your cousin over?
Personally, I would never loan money to family. I'd gift it to them with no expectation to get it back, if they do pay you back it's a bonus. If they don't pay you back, is it really worth losing your relationship with your cousin over?
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