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

[James Barnes]

Posted this when all of the Korean content was being posted. Just Bumping it.

[Brandon Hall]

@James Barnes

A loan at 0% could be seen as a gift which is likely the issue that is being brought to your attention. To avoid this, you need to make the loan look like an arm's length transaction. So you will need to set an interest rate closer to market and create appropriate documentation outlining the legalities of the loan.

Of course the gift implications may not even be anything to worry about depending on who is loaning your the money and what their net worth is.

[James Barnes]

@Brandon Hall

I've been pointed towards this article from another BP member

https://www.nationalfamilymortgage.com/afr-rates/

Should I abide by these rules and regulations?

Does the loan or income she receives(from my wife and I) even need to be documented?

What if we were to just say that the financing I am getting from the bank to "buy her out" of her current mortgage is the one and only deal?

Her net worth isn't anything of significant proportions.

I think she may get an amount of a little over 4k a year from us for the loan. 3k principal and at 1% 1k interest. Why does this part of the deal even need to be documented?