encumbering an unencumbered property

[Lynn Potter]

Greetings,

We have an investment property that is not officially unencumbered, we borrowed money from a family member a few years ago, we were supposed to make payments but have not been able to, the family is ok with this as long as the loan gets paid back. Given that this property looks like a open opportunity for a person to sue us, we would like to officially encumber so that it shows on county records. We are in California, we do trust deeds out here or we could do a lein. I dont know the best way to go about this. If its a loan without interest, Im told, the IRS will see this as a gift, and want taxes. Any suggestions? thanks to all responders.