question regarding loaning money to a family member

Old Whaler · #1 08-03-2009, 07:49 AM

Before I get to my question, I know loaning money to a family member is a bad idea, but I'm comfortable it will be paid back. My question is how does the bank and IRS distinguish between a gift and a loan. I will be loaning more than the $12,500 gift maximum and if I give them a check for the entire amount, is it going to throw up a red flag at their bank and mine?

RonE · #2 08-03-2009, 09:32 AM

Most banks report transactions over $10,000 as required by law. Some report transactions over $5,000.

Loans are not reported as income and are not taxable to the borrower. Interest on the loan might be a deduction for the borrower depending on what the loan is for. Interest on the loan is usually considered as income by the IRS for the lender.

If the loan is to buy a house or other real property, the interest will be deductable for the borrower. The lender (you) should insist (in the case of a real estate loan) on a note secured by a deed of trust and a lenders policy of title insurance.

Gilbert · #3 08-03-2009, 01:14 PM

Quote:

Originally Posted by RonE

Most banks report transactions over $10,000 as required by law. Some report transactions over $5,000.

Loans are not reported as income and are not taxable to the borrower. Interest on the loan might be a deduction for the borrower depending on what the loan is for. Interest on the loan is usually considered as income by the IRS for the lender.

If the loan is to buy a house or other real property, the interest will be deductable for the borrower. The lender (you) should insist (in the case of a real estate loan) on a note secured by a deed of trust and a lenders policy of title insurance.

what this guy said.

kenny · #4 08-03-2009, 02:03 PM

"The lender (you) should insist (in the case of a real estate loan) on a note secured by a deed of trust and a lenders policy of title insurance."

I used to borrow money from my Pop to buy real estate. It was a good deal for both of us. It was easier for me, and he made more interest than he was in CD's. In fact he usually wanted prime plus 2%! LOL
We always had a contract, that way everyone was clear what was expected so we never had any problems.

VelShirley · #5 02-04-2010, 05:17 PM

Be careful, if the loan is for realestate and there is a primary lender ahead of you. As a second lien holder, you could be left in a position to buy out the first to protect your second or let it go because you can't buy out the first.

If it is to aid in buying a primary home, make sure the loan will be approved with the first lien holder.

If the loan is for other or smaller purposes, make sure you are protected with a lien or promissory note and have it recorded.

Quote:

Originally Posted by RonE

Most banks report transactions over $10,000 as required by law. Some report transactions over $5,000.

Loans are not reported as income and are not taxable to the borrower. Interest on the loan might be a deduction for the borrower depending on what the loan is for. Interest on the loan is usually considered as income by the IRS for the lender.

If the loan is to buy a house or other real property, the interest will be deductable for the borrower. The lender (you) should insist (in the case of a real estate loan) on a note secured by a deed of trust and a lenders policy of title insurance.

dboat · #6 02-04-2010, 07:39 PM

what these guys said.. always always always have a loan document.. also, if you end up forgiving the loan.. it becomes taxable income to the loanee..

Dana

Swells · #7 02-04-2010, 09:41 PM

I dunno, I borrowed money to go to grad school and buy a house, everything under the table and no contract, and my dad was paid off a little every month. The money came in 2 or 3 checks of a similar amount totaling about 12K. I paid back when I could LOL, no fancy accounting. I got that down to a couple grand and when I (finally) graduated, dad said he'd right off the balance as a graduation gift. It certainly worked for me. Best thing that ever happened to me.

Thanks dad!