Earlier this year, I purchased a house and, though I had the funds, my parent insisted to support financially. We have a very good relationship and they expect no payment or strings attached in return (truly). However, I want to treat it as a family loan so that I don’t have to pay taxes on that amount since it’s over the $15,000 tax free gift amount (I live in the US).
I’ve heard a way to document the family loan is via a promissory note. Is that the best way?
Are there recommendations for a good promissory note template?
What terms do I need to be aware of setting with the note and what kind of interest needs to be paid back with it?
How should this transaction get reported on my taxes? I live in the US.
You don’t have to pay taxes on the gift over 15k, you just have to report it. The IRS then keeps a tally of these reports in case you get above the lifetime threshold.
The lifetime limit is $11.7 million, if that concerns you…we should become friends LOL!
https://www.fidelity.com/viewpoints/wealth-management/insights/lifetime-gift-and-estate-tax-exclusions
~~Your underwriter and/or real estate agent will be able to provide a templated letter for you to use.~~
~~It will not be called a promissory note because that implies a loan.~~
The gift reporting to the IRS is completely separate. Parents fill out Form 709 and mail it to the IRS.
Gifter: they don’t pay any tax until they exceed $11.7M in their lifetime. They have to report gifts over $15k in a given tax year but it’s not taxed.
Receiver: never pays gift or income tax on gifts. Doesn’t matter how large the gift is.
https://turbotax.intuit.com/tax-tips/estates/the-gift-tax-made-simple/amp/L5tGWVC8N
If it’s a gift you don’t need to do anything. The giver has to report it as a gift so it counts towards their lifetime gift limit of over $11 million dollars.
https://blog.taxact.com/gift-tax-do-i-have-to-pay-gift-tax-when-someone-gives-me-money/
Beyond what everyone is saying about gifts, don’t report it as a loan because then your parents will be required to pay taxes on interest of the loan (even if you didn’t pay interest). To sum up — do NOT consider this a loan or your parents could be stuck with extra taxes.
[Family Loans ](https://www.google.com/amp/s/blog.taxact.com/family-loans-lend-my-kids-money/amp/)
Fun fact: it’s actually a legal issue to borrow money for a down payment and not disclose it, assuming that’s what you meant.
If they gift you the money for a down payment, no big deal. But the mortgage company considers all debts/loans that you have when deciding to grant you a mortgage. If they saw $15k show up in your bank account or asked you where you got the money for a down payment, it’s fine to say it’s a gift from your parents. It’s NOT fine to say it’s a gift, but it turns out it’s actually a loan. That’s fraud.
Thanks for the quick guidance all!
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