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But lending money to relatives can have tax consequences.
The IRS requires that a minimum rate of interest be charged on loans. If you do
not charge at least the minimum rate, the IRS will still require you to pay tax
on the difference between the interest you should have charged and what you
actually charged. If these excess amounts become large, or if the loan is
forgiven, there may also be gift tax implications.
There are some exceptions, though. Loans of up to $10,000
generally can be made at a lower (or zero) rate of interest, as long as the
proceeds aren?t invested. Loans between $10,001 and $100,000 are exempt from
the minimum interest requirement as well, as long as the borrower?s investment
income is $1,000 or less. If the investment income exceeds $1,000, you?ll be
taxed on the lesser of this income or the minimum IRS interest.
For the IRS to treat the
transaction as a loan and not a gift subject to the gift tax rules, the
transaction must look like a loan. The borrower should have the ability to
repay the principal and interest. A contract should be prepared which specifies
the loan amount, interest rate, the payment dates and amounts, any security or
collateral, as well as late fees and steps to be taken if the borrower doesn?t
pay. Have the document signed and dated by all the parties. For assistance,
give us and your attorney a call.
Last Updated by Noel Dalmacio on 2012-07-19 10:44:00 AM