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Are Private Loans to Your Child Taxed? | Davenport Finance

We have gotten this question a handful of times now. This has been mostly from parents who want to help their child out and give them a private loan, instead of their child having to get a loan from some sort of entity. With the financial climate of today, we can understand why a parent might want to help their child out in this manner.

With this being said, the IRS does not typically care if you give a personal loan to your child. They also do not really care if interest gets charged or if your child pays you back. But, just like all facets of life, there are always exceptions.

If you loan more than $14,000 and do not charge interest, you must file a gift tax form. This has to do with the $14,000 limit per person of annual gift giving. The interest rate must match the minimum interest rate that the IRS deems appropriate. The loan must also be legal, or else the IRS will consider it to be a gift. The loan document does not have to be anything fancy. It needs to indicate the amount of the loan, the length of the loan, the interest rate, and any collateral if there is any. Both parties need to also be sure they sign the document. If it is a complex loan and it has to do with real estate, for example, we would suggest you have a lawyer help you with documenting it.

If you lend your child less than $10,000 and your child is not investing that money, you will not be applicable to the gift tax rules. If you lend your child less than $100,000 for investment purposes but they do not receive an income of any more than $1,000 per year, you are also not applicable to the gift tax rules.

As mentioned, just like any situation, there are exceptions to every rule. If you do not want to deal with any of these potential issues, we would strongly advice you that you or your child contacts us to get situated for a private loan. As mentioned in past posts, if your child is young and does not have the best credit, you can be their co-signer.

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