| T.R | Title | User | Personal
Name | Date | Lines |
|---|
| 603.1 | taxable to giver, not "givee" | TLE::JBISHOP | | Thu Oct 28 1993 16:28 | 20 |
| Nope.
The IRS assume the loan is at some IRS-chosen "market" rate,
and that the lender is forgiving the interest, which is thus
a taxable gift from lender to borrower. The borrower is not,
I believe, allowed to record this interest as interest paid
(though maybe they would be if the interest were actually paid
and the gift were a separate transaction).
If the imputed interest is less than the excludable gift limit
($10K per person-from, per person-to, per year), then no gift
tax is due. If the relative is married and makes the gifts to
your and your wife, that's two givers and two recipients for a
total exclusion of $40 K per year.
If you're worried, ask a lawyer.
What's in it for the relative?
-John Bishop
|
| 603.2 | | 3745::DCOX | | Thu Oct 28 1993 21:41 | 11 |
| If it is a no interest loan and NOT a gift, there are no tax implications. The
proof of loan is best some written indication of presumption of repayment. A
note stipulating the agreement and pay back schedule will suffice.
Of course, since I will not be signing the tax returns......
If you have any questions, just call the IRS (and keep calling until you get
the answer you want) :-)
As Always, For What It's Worth,
Dave
|
| 603.3 | | NETRIX::michaud | Jeff Michaud, PATHWORKS for Windows NT | Fri Oct 29 1993 01:54 | 10 |
| > If it is a no interest loan and NOT a gift, there are no tax implications.
From what I've read there is. Basically the lender has to declare
as income what the IRS believes the FMV interest rate is, even
though you're collecting no interest.
Similiar situation if you have rental property that you
rent to a relative below FMV. You have to declare as
income the FMV. Or so I've been told. As has been mentioned,
ask your lawyer or accountant.
|
| 603.4 | | 3745::DCOX | | Fri Oct 29 1993 06:52 | 23 |
| Rental property is another issue. As long as you claim the rental space as a
business and, therefore, benefit in tax avoidances (depreciation, etc), then
there are tax implications in free-renting the space.
With a no interest loan, you are taking money that has already been taxed at
your going rate. Since you are not charging interest, you have no future
income that has not already been taxed; since the loanee is not claiming a
interest deduction, there is no tax avoidance involved; since it is a loan,
gift rules do not come into play.
Or, to bring the rental analogy closer to the free loan. Consider the case if
you decide that you want to let your in-laws live with you in your house and
you build an in-law apartment complete with bath, kitchen, etc. If you never
claim this as a business, if you never claim ANY tax implications from this
including, - that is, they stay with you for free - , there is no tax
implication. Indeed, you COULD use that as justification for claiming them as
dependants if you can also prove that the fair market value of the apartment,
the cost of their food that you buy, etc comes to more than 50% of their
expenses.
As always, For What It's Worth...
Dave
|
| 603.5 | Taxes due by lender | KOALA::BOUCHARD | The enemy is wise | Fri Oct 29 1993 09:57 | 4 |
| My understanding matches that of .3 -- the person making the
no-interest loan is expected to pay taxes on the income they would have
received from a 'fair rate' loan.
|
| 603.6 | ps: I should of proofread, but it's early :-) | NETRIX::michaud | Jeff Michaud, PATHWORKS for Windows NT | Fri Oct 29 1993 10:05 | 16 |
| > Since you are not charging interest, you have no future
> income that has not already been taxed; since the loanee is not claiming a
> interest deduction, there is no tax avoidance involved; since it is a loan,
> gift rules do not come into play.
I only can repeat what I've heard (probably from CNN HN,
or one of the news magazines).
Even if it one was legally supposed to claim potential interest
money loaned out interest-free, it sounds impossible for the IRS
to find out about and hence is probably never reported. Remember
how much unreported non-cash (ie. barter) income goes unreported.
Of course I could of mis-heard :-) But if it's one thing I've
come to learn either way, the tax laws most of the time don't
make logical sense, or are not always fair.
|
| 603.7 | taxes to IRS by borrower | SLOAN::HOM | | Fri Oct 29 1993 11:26 | 24 |
| > ============================================================================
> Note 603.5 Tax impact of interest-free loan from relative? 5 of 6
> KOALA::BOUCHARD "The enemy is wise" 4 lines 29-OCT-1993 09:57:02.90
> -< Taxes due by lender >-
> --------------------------------------------------------------------------
> My understanding matches that of .3 -- the person making the
> no-interest loan is expected to pay taxes on the income they would have
> received from a 'fair rate' loan.
>
The borrower - NOT the Lender - owes taxes to the IRS for implied income.
The author of .2 is correct. The lender owes no taxes.
Take a look at the '93 Digital proxy statement.
One of the Digital VP's was granted a loan to buy a house in the Boston
area. The interest rate, according to the proxy statement, was set at
the minimum rate to avoid implied income to the VP from the IRS perspective.
From this statement, one can infer that interest free
loans do constitute income to the borrower from the IRS perspective.
Gim
|
| 603.8 | | TLE::EKLUND | Always smiling on the inside! | Fri Oct 29 1993 16:51 | 10 |
| I tried to find this in the last IRS Pub 17. Not much luck,
However, under Interest Income, there is a reference to "interest
on below-market loans" which refers you to Publication 550, which is
Investment Income and Expenses. If you REALLY want to know the legal
fine points, just pick up that publication. But, as has been pointed
out, a private loan of this nature is certainly impossible for the
IRS to detect.
Dave Eklund
|