family loan with deferred interest and principle -- does this work?

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BobbyB
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Joined: Thu Apr 22, 2021 7:29 am

family loan with deferred interest and principle -- does this work?

Post by BobbyB »

In order to not have tax-related problems (i.e. having to report imputed interest income) for a loan to a family member, you need to charge the applicable federal rate (AFR), but are regular interest and/or principal payments required?

Suppose I make a loan to a family member at the AFR but the terms of the (written) note state that no principal or interest payments are due until the end of the loan, i.e. the principal and all the interest are due at the end of the term. Does this pass muster with the IRS? I would think that since I eventually get taxable interest income that the IRS should be happy...

In case it makes a difference, the loan would be secured by a mortgage/lien on a house and would be for a term of at least 10 years. Probably also stipulating that the principal and accumulated interest could be paid off early, e.g. if the house were sold. (And yes, it would be for more than $10K, the threshold at which the AFR and imputed income rules apply.)

Please -- information/comments only on the tax treatment of this arrangement, I'm not looking for advice on the wisdom of making a loan to a family member.

thanks!
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