Loaning Money Can Be Costing You Interest

Physician's Money Digest, February 2007, Volume 14, Issue 2

Investor's Business Daily

As a physician who is generous withtheir money as well as their time, be awarethat giving a relative an interest-free loancould actually cost you money. You couldend up paying taxes on interest that younever even collected. If you loaned yourson $500,000 for a condo, the IRS couldinclude $25,000 interest on that loan evenif you never collected that interest. As withany interest received, you would have topay income tax on the $25,000 yearly, aswell as file a gift tax return for thatamount—because if you are not chargingthe interest, it is considered a monetarygift. An article in explains that if the money you loan doesnot exceed $10,000, no interest is imputedas long as it's not a loan for an income-producinginvestment. Loans up to$100,000 are immune to taxes if the borrower'snet investment income is less than$1000 each year. The IRS may also imputeinterest gaps. For example, if you chargea relative 3% when the annual percentagerate is 5%, the IRS will charge you thatmissing 2%. A possible solution is callingthe loan a demand loan—collectable onthe loaner's demand without a maturitydate—which is a short-term loan, and isless taxable by the IRS.