Although this blog has touched on the subject before, it may be helpful to review the possible consequences of family loans.
Many residents of White Plains and other parts of the greater New York City area may find family loans to be both advantageous and convenient. For those who may have no credit or marred credit, a loan from a wealthier family member can be a real lifesaver.
However, there as potential tax considerations associated with these loans. For one, it has to be crystal clear to taxing authorities that the loan is indeed a loan and not a gift simply labeled as a loan. Giving a large amount of money to a relative while nominally calling it a loan can lead to tax controversies over whether gift tax is owed.
On the other side of the same coin, family loans often come with low interest rates. As with any other loan, the person earning the interest must report it as income. Moreover, should the interest rates fall below prevailing market rates, the lender may have to report interest income as if he or she had earned interest at the market rate.
Likewise, should the family member who receives the loan not pay, the borrower may be inclined to forgive or forbear on the loan. While this is generally seen as a good thing, it can lead to tax issues since forgiveness of a debt has to be reported on one’s income tax returns.
Many New Yorkers benefit from family loans. When they do so, they need to be aware of potential tax consequences. Should taxing authorities confront someone over a family loan, it may be best for that person to seek the help of an experienced attorney.