Tax Implications of a Intra-Family Loan

[James Barnes]

It's been brought to my attention that a intra-family loan may have tax implications if not done correctly. The current deal I'm working on is going to go down like this:

Bank loan:

120k Conventional 30yr Fixed Rate. 80k of that loan is going to the actual pay off of the sellers existing loan. The seller in this case being the Mother-In-Law. 34k is going to "repairs" and the rest is being used to roll in closing costs that way it's no money out of pocket at closing. The seller will get all of the 114k(120k-6k for closing=114k), pay off her mortgage(80k) and use the remaining(34k) as a "gift of equity" and return that cash back to us for repairs. That's the "official" part of the loan that's being done by a Mortgage broker/lender.

Seller financing:

The other part of the loan is going to be around 120k over 30yr seller financing. We were wanting to do a interest rate as low as possible, maybe even 0%, but it's been brought to my attention that there could be tax implications if done this way.

What tax implications would the provided scenario have?

Anyone with experience doing intra-family loans that could give my advice on what to do next?

is it RE attorney time?

Thanks ahead of time for the input

James