If you lend money to someone (even a child) and charge no interest, the IRS will impute interest income to you at current interest rates. In June, for example, loans with terms of 3 to 9 years will be imputed a 2.25 percent rate.
Say you make a $150,000, five-year loan to your son but charge no interest. The IRS will impute $3,375 of taxable interest income to you, each year: 2.25 percent of $150,000. That’s true even though you didn’t receive any money. To avoid such a tax:
* Lend no more than $10,000. No tax will be imputed as long as the money isn’t used to make income-producing investments.
* Lend no more than $100,000. No tax will be imputed as long as net investment income (from interest and dividends) is no more than $1,000 each year.
* Lend more and collect interest. Say you lend your son $150,000 and charge him 2.25 percent: $3,375 a year. Your son will pay less interest than he’d pay on a mortgage from a bank while you will collect more than you’d earn on many bank accounts.
