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Dispel ‘phantom income’ on family loans

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in Small Business Tax

Suppose your adult child needs a helping hand to launch a new business or buy a home.

Strategy: Give the child a low- or no-interest loan. As long as you stay within the tax law boundaries, your family will have no tax worries. However, if you’re not careful, you could be blindsided by an unexpected tax bill.

With the interest rates remaining on the low side, this may be a good time to arrange a loan from a gift-tax perspective

Here’s the whole story: The tax law discourages intrafamily loans where you don’t charge any interest or you charge interest at a below-market rate. In brief, interest income may be imputed to the lender under the following sequence:

  • You’re treated as having charged interest to the borrower.
  • You’re treated as having made a gift of the interest to the borrower.
  • The borrower is treated as having used the gift to pay the interest to you.
  • You must report the deemed interest income o...(register to read more)

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