PE CPA PLLC

The deadline to purchase new QBD products is September 30, 2024. This does not affect individuals with current Desktop subscriptions.

PRISCELLA'S PICK

Using Family Loans to Secure Better Home Loan Interest Rates

Here’s some information on how you can help a family member buy a home by making a loan to them while ensuring that you and the family member benefit from a tax-smart loan structure.

With the current national average interest rates for 30-year and 15-year fixed-rate mortgages at 6.81 percent and 6.13 percent, respectively, family loans can offer a much more attractive alternative. By charging the Applicable Federal Rate (AFR) as interest, you can give the borrower a good deal without giving yourself a tax headache. Click on the following link to lookup the current AFR - https://www.irs.gov/applicable-federal-rates.

Charging at least the AFR for a term loan to a family member allows you to avoid federal income tax and federal gift tax complications.
But if you charge less than the AFR, you may need to navigate some tax complications. Two tax-law exceptions, the $10,000 and $100,000 loopholes, can help you avoid these complications, although they may not be suitable for all home loans.

It is crucial to document the loan with a written promissory note and secure it with the borrower’s home for them to claim deductions for qualified residence interest expenses. Make sure the borrower signs the note and that the note includes details such as the interest rate, a schedule of interest and principal payments, and any security or collateral for the loan.

Applicable Federal Rates | Internal Revenue Service IRS provides various prescribed rates for income tax purposes.