Now you can lend money to your loved ones and set easy repayment terms. If done properly, you can avoid gift taxes while your family members can deduct any interest they pay. Recent applicable federal rates (AFRs) were:
1.81 percent for loans of less than three years
3.43 percent for loans of three to nine years
4.90 percent for loans longer than nine years
The AFRs change each month. In the past three years, they have plummeted. As long as you charge at least the current AFR on intra-family loans, no taxable gift will be inferred.
For example, you might lend money to your son and daughter-in-law so they can buy a home, interest-only, with the principal due in 30 years. You can charge your son and daughter-in-law as little as 4.90 percent, assuming that the long-term AFR is at that level when you make the loan. No gift tax will be imposed as long as the interest rate is at least the AFR. As a result, your son and daughter-in-law get to borrow at a rate below standard mortgage rates-without all the paperwork hassles. If the loan is secured by a mortgage on the house, the borrowers will be able to deduct the interest on their loan payments.