taxes

Low rate on family loan can trigger gift tax

Don TaylorQuestionDear Dr. Don,
I plan to lend a family member a sum of $30,000 and need to know what interest rate I should be charging him. He will be paying the loan back within six months.
-- Bank of Briana

AnswerDear Briana,
It's really up to you what rate to charge him. If the rate is below the applicable federal rate, or AFR, the reduction in interest expense is considered a gift. An earlier column, "Family loan raises crucial tax issues," talks you through the AFR and gift tax issues.

Regardless of how close the family member is, I think you need to seal the deal with more than a handshake. Document the loan terms, including interest, and establish what recourse you have if the payments aren't made as planned. The Bankrate feature "Lending to friend? Charge interest" has a link to blank promissory note forms.

Given the short-term nature of the loan, it's up to you whether to receive monthly payments or a lump sum at the end of the loan. You can use Bankrate's Interest-only loan payment calculator to calculate the monthly interest payment.

Ask the adviser

To ask a question of Dr. Don, go to the "Ask the Experts" page, and select one of these topics: "Financing a home," "Saving & Ivesting" or "Mney." Read more Dr. Don columns for additional personal finance advice.
 

Bankrate's content, including the guidance of its advice-and-expert columns and this Web site, is intended only to assist you with financial decisions. The content is broad in scope and does not consider your personal financial situation. Bankrate recommends that you seek the advice of advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy. Please remember that your use of this Web site is governed by Bankrate's Terms of Use.

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