Tax Treatment Of A Personal Loan

Tax Treatment Of A Personal Loan

Loan: My Mother allowed me to borrow $100,000. in 2006 as an advance against a future lifetime gift of in excess of $250,000. I believe the terms of this loan, which was my only income for the year, should be summarized, for tax purposes, in a promissory note with a nominal amount of interest. Can I do this or should my attorney? Thanks


Anytime anyone loans or borrows money you should document it with a loan agreement. If not, the IRS could argue that the transfer was a gift. The loan document should include reasonably sufficient terms to make it a real note that really protects the lender's interests. The check (if the loan was made by check) should indicate in the memo column "Loan". Both parties to the transaction, in this case you and your mom, should treat the transfer as a loan (e.g., if you keep records on Quicken, set up a loan payable account).

You said the loan is an advance against a future gift. It is unlikely that your mom is committing in writing to the gift so you still need to address the structure of the loan. Perhaps it should be a demand loan, due on your mother's calling it. If the loan is to count as an advance against say a $250,000 bequest your Mom's will could be revised to reflect this.

Who is your mother's agent under her power of attorney? Could they call the loan if your mom is ill in the future?

The loan is not "income" it is a loan that should not trigger any income tax reporting to you, other than interest expense deduction.

A promissory note might be fine. Your mom might want to secure the loan with a mortgage or other device if you are very concerned about malpractice or other risks.

You indicated that the loan could state a "nominal interest". You need to state sufficient interest to avoid the imputation of interest income. The minimum interest rate your mother has to charge vary depending on the circumstances. There are a series of complex rules that govern what is a below market loan, and what the implications of such a loan are. Your accountant or tax attorney can advise you on the details of the minimum rate to charge. It may depend on how large the loan is, what other income you have, etc.

This website encourages everyone to understand legal and other implications of transactions, not to play lawyer. You're always wiser to consult a professional who might identify ancillary issues (or more) that you or any lay person could miss. Understand the transaction, prepare as much as possible, those steps will save lawyer (and other professionals) time and hence cost, but don't do it alone.

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