IRS Rules for Personal Loans

[TaoWanderer]

What is the name of your state?What is the name of your state? NV

Two of my good freinds in 2004 gave me money to invest in real estate, one person $152k the other $46k. My plan was to call it a personal loan and pay the money back plus 3% APR in one balloon payment at the end of 20 years and write up a contract between my friend and I. Each year, each of my friends will forgive $11,000 of the loan as a gift to me. Before the 20 years are up the entire loan amount will be forgiven.

My question is if this is legal according to the IRS and will my friend or I have to report this to the IRS?

Will this classify as a loan or do I have to make monthly / yearly payments?

Would 3% APR be an acceptable interest rate, because I noticed on the IRS web site, they said that a interest free or reduced interest loan might be considered a gift?

Does this contract have to be notorized?

Also my bank account went from $15k to $200k would this bring attention (raise red flag) to the IRS?

$22k was wired to my account from a Swiss Bank account, would this raise a red flag or generate a report to the IRS from my bank?

I just want to protect my friends and I in case we get audited.

Thank You All, I sincerely appreicate your help.

 

[davidlanderson]

You might want to look at http://www.irs.gov/pub/irs-drop/rr-05-23.pdf to get the approrate applicable Federal rate which is the minimum interest rate at which a loan will be considered at arms length. Otherwise there may be gift tax implications. You can get more information on below market loans from pub 550 http://www.irs.gov/pub/irs-pdf/p550.pdf on page 6.