Level 2

Note Payable 5% 5 years Principle and Interest payable July 2022 - Can interest be forgiven?

Forum|Forum|4 years ago
March 10, 2022
3 replies
14 views

Private lender wishes to be paid 150K principle only and receive no interest as a gift to borrower. Will IRS require lender to charge published AFR IRS rate from time of note? Any way to avoid the borrower from paying interest?

Can note be amended to reflect no interest charged or terms amended to avoid inputed interest?

Tax Talk

This topic has been closed for replies.

qbteachmt

Level 15

You state this: "as a gift to borrower"

Have you done the math for "gift" limits?

Don't yell at us; we're volunteers

D

dnplansAuthor

Level 2

Using June 2017 applicable Federal rates mid term rate of 1.9% the interest that must be charged is $13,680.

The original note at 5% interest would have been $36,000.

Is the gift considered the difference of $22,320?

Or if no interest is charged via an amended note - would the gift be $13,680?

Thanks for your thoughts. Debra

sjrcpa

Level 15

Is this a loan between family members?

Or do the parties have a business relationship?

The more I know the more I don’t know.

D

dnplansAuthor

Level 2

No business or family relationship

BobKamman

Level 15

The government cannot require that interest be charged. In fact, during the Middle Ages, the government prohibited interest from being charged, so the major banking families had to make money only on "late fees." What the government can do is require interest-free loans to be considered as having a gift element if there is no interest stated above a certain rate. You can calculate that amount and then figure out whether, together with other gifts to the same individual, the amount involved rises to the level at which a gift tax return is required.

See also, "the parents that can't afford to give away money to their kids often do, and the parents who can afford to give away money to their kids seldom do."

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