Gift or loan?

[TABBY411]

What is the name of your state? Ohio

I have read what the forms say about a gift tax but it is not clear when it comes to how or what a no interest loan is considered and whether it needs to be reported. I am loaning a long time friend $20,000 for three years and as long as he pays me back in that time frame there will be no interest and if it isn't then there will be a high interest rate on the balance so he has incentive to pay me back. What tax implications are there if he does pay me in full within the three year timeframe?

He owed a lot on a credit card and was paying 20+% interest so I am helping him out because we hope to buy a condo in a few years and go halves but right now his credit is not too good. We have been friends for 30+ years and I have a promissory note. The $20,000 was making less than 1% in interest so I don't feel like I am losing much while I am saving him alot and this will help us later with the purchase. This is just FYI in case it sounds awfully generous of me.

 

[abezon]

Failing to charge market rate interest (4-10%) is a gift, but would not be reportable unless the total interest for the year would have been over $11,000. To get $11,000 interest on a $20,000 loan, you'd have to be loan-sharking & should really be posting on the criminal law forum instead of here.

Be sure your loan documents are clear, signed, & notarized. Also, you should have a written agreement regarding co-ownership. It would be better if you replaced the unsecured loan with a loan against the condo so that your $20,000 is more protected than a personal loan.

 

[TABBY411]

Thank you for the reply and the humor. I had him sign a promissory note but I did not sign it or have it notarized. The note says that interest will start if not paid in full by a certain date. The loan is just a personal loan between us two and is seperate from the future possible purchase of condo. I am hoping that he has me paid in full and his credit back in good shape, which is part of the reason for this loan, before we proceed to buying a vacation condo together.

It makes a little more sense now that you have stated it the way you did. I was worried that somehow the whole amount of the loan would be considered and I would somehow have to pay tax on interest that I am not even charging. And I had read about the federal minimum rates and that worried me. But it sounds like you are saying, and it makes sense, that I would have to use the FMR and if the interest amount at that rate was under the $11,000 gift amount then I wouldn't have to worry about it. And even if the FMR is 10% then I could loan him $109,999 interest free and not have to worry about gift tax because my gift to him would be an "imaginary" amount of $10,999 which is under the reportable amount.

If I were to actually charge him interest then I would have to report that as interest income. Is that correct?

 

[abezon]

Correct. Also, if you were related, you'd have to declare the interest as income whether you collected it or not. Since you aren't related, you needn't worry about this.

 

[TABBY411]

Wow! That liitle tidbit about a loan to a relative is fascinating and I am glad you mentioned it. I just hope I remember that if I ever decide to loan my brother money and he is presently in a spot where he needs some. Thanks a ton