Ella Vincent of Kiplinger’s personal finances
Question: My son and stepdaughter want us to lend them money to pay us a down payment at home. How do you do this and what are the advantages and disadvantages?
Answer: If your adult child or another family member asks you to lend you money, for example, to pay a wedding, a down payment at home, or other major expenses, you may want to help. And with solid plans in place, Instarfamily Loan can be content with providing a low-cost way to borrow money to your loved ones and providing assistance. However, when deciding whether or not to extend your loan, be aware that you may not get your money back. And if that happens, the relationship with the borrower can suffer. Don’t lend more money than you can afford to lose.
Decide the conditions. If you decide to proceed with your loan, putting repayment guidelines in writing can help you ensure that the terms are clear and that they may improve your chances of repayment.
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If the interest rate on a loan of $10,000 or more is not at least as high as the AFR, you can borrow taxes based on the difference between the AFR and the interest rate you actually charged. If your loan amount is under $10,000, you can set a tax rate (including 0%) (including 0%) without worrying about the outcome of these taxes.
If your loved one defaults on the loan, a written contract you create may protect you. If you can demonstrate that the loan is uncollectable, you may be able to claim a deduction for non-business bad debts. Bad debts are treated as short-term capital losses on your tax return, says Marianela Collado, CFP, Tobias Financial Advisor in Plantation, Florida.
Consider gifts instead. To avoid the complications that could result from offering a loan, if you can afford it, you can make the money a gift. However, if the annual gift tax exemption ($19,000 per recipient in 2025) is exceeded, you will be required to file a gift tax return with the IRS, and that amount will be counted against your lifetime real estate tax exemption. If you are married, you and your spouse can give a total of $38,000 per recipient without filing a gift tax return.
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The views and opinions expressed are those of the author. They are for general informational purposes only and should not be interpreted or interpreted as recommendations or solicitations. Epoch Times does not provide investments, taxes, legal, financial planning, real estate planning, or other personal financial advice. Epoch Times is not responsible for the accuracy or timeliness of the information provided.
