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Financial Planning / Tax Strategies


Subject:  Re: private loan - details, details... Date:  8/4/2004  2:16 AM
Author:  JAFO31 Number:  72734 of 120439

Foolferlove: "I'd like to take a loan out at the first bank of Lorenzo too. 4 percent sounds real good to me! Where should I send the application?


Actually, I do have a real question...Can I loan money to a family member and charge zero interest with an indefinite repayment period? Or is this kind of loan somehow a no-no since it can be used to get around gift taxes?"

IIRC, it can create phantom income for the lender (and potential gift tax issues if the loan is relatively large). My recollection is a bit hazy, but a believe that there is a de minimis exception for loan below a certain size (mayber 10k?); but in any event, if the loan is has a below market rate --- by reference to some applicable "federal funds" rate --- then the IRS will impute additional interest until the rate is at the "federal funds" rate the the lender needs to recognize phantom income (as if the interest were paid and then gifted).

For example (all numbers hypothetical) if Daddy Warbucks loans Warbucks Junior $800k at zero interest when the applicable rate should be 4%, then Daddy Warbucks is deemed to have 32k in phantom interest income (800k * [4% - 0% charged]) on which income tax is due and is also deemed to have made a gift of the 32k interest not collected, which is larger than the 11k annual exemption (or 22k if Daddy Warbucks is married), so a gift tax return would also be due, unless Warbucks, Jr. is married, too - because 32k less than 44k available from a married couple to another married couple.

One fo the resident pros will need to add the exact details and citation.

Regards, JAFO
