No-interest and low-interest loans to family members may have unpleasant income tax and gift tax consequences for the lender. There are some exceptions, though.
* The $10,000 exception. If the cumulative amount of outstanding below-market loans to a borrower don’t exceed $10,000, no tax problems will arise. That’s true as long as the borrower doesn’t use the loan to make income-producing investments.
* The $100,000 exception. Low-interest loans up to $100,000 per borrower also may be tax-free. To qualify, the borrower’s net investment income must be no more than $1,000 each year. Net investment income usually refers to interest and dividends.
Suppose you lend your son $100,000, interest-free. He reports $900 in interest income and dividends. There will be no tax consequences.
On the other hand, suppose that your son has $1,100 in interest and dividend income this year. In this situation, you (the lender) would owe tax on $1,100 of interest income you didn’t receive.
