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A Guide to Gifting Loan Balances

written by: nataliajones•edited by: Jason C. Chavis•updated: 6/14/2011

You may have a family member or friend that really needs your help financially and while you may be able to assist you still need to know how to gift loan balances and what the implications may be.

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    How to Gift Loan Balances As the name implies a gift loan is simply a financial arrangement between two friends or family members. One person, the lender, gives an agreed sum of money to the other, the borrower. This gift loan becomes necessary because the borrower would not be able to qualify for the loan from a more traditional source, so the family member or friend steps in to help out. The following discussion will highlight how to gift loan balances.

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    How to Gift Loan Balances

    Just because the loan is called a "gift" does not mean there is no need to repay the sum borrowed. As a matter of fact, the loan can even involve the payment of interest, but all the terms must be outlined in an agreement. There is no need to get a lawyer to draft up a contract, but there should be a letter stating the amount borrowed, the agreed amount of interest to be paid and the duration of the loan.

    The concept of a gift loan should not be confused with pure gifts. An individual is allowed to gift or give away up to $13,000 per tax year, per child as of 2009 and this amount would be tax exempt. However, in this case there is no expectation of repayment and this is the fundamental difference between a gift and a gift loan.

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    Tax Implications of Forgiving a Loan

    A gift loan can be put in place to pay off the balance of an outstanding loan. For instance, a parent may decide to give a child $10,000 to get rid of a student loan as this would make it easier to save for other goals. The child may be expected to repay the principal at a time in the distant future, but no interest would be charged. This undoubtedly saves the child a bundle in interest, but what about the tax implications of the transaction?

    If the loan is considered to be a gift there are no tax consequences for either party as long as the gift falls within the parameters set by the IRS. To qualify for this tax exemption the gift loan must be less than $100,000 and the interest income should be less than $1000. However, if the terms of the loan generates interest income that is greater than this amount or the principal of the loan exceeds this balance the gift loan must be reported on the tax return on the lender.

    If a parent lends a child $150,000, the parent must state a figure that represents the interest income on their tax return. This is true even if no interest is actually collected, because the parent may be called upon to impute an interest charge and pay taxes on that amount.

    While it might be within your means to offer assistance it makes sense to find out what the consequences are likely to be so there are no unpleasant surprises at tax time and you are clear on how to gift loan balances.

    References:

    Tax Implications When Parents Gift a Loan Balance

    IRS Information

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