When you borrow money or borrow money from someone you are related to, you extend or receive a family loans. Home loans can be a quick and easy way to help a loved one access finance quickly without incurring high interest rates or going through the paperwork of applying for a loan.
On the other hand, family relationships can deteriorate if the borrower fails to repay the debt as planned. A family loan is not considered a gift as long as repayment is expected, but the rules depend almost entirely on the parties involved. Some variables to discuss with a family member are loan amount, interest rate, and repayment terms. Be sure to pay attention to the tax consequences that can be associated with borrowing or raising money within the family. ์นด์ง๋ ธ์ฌ์ดํธ
Create a Family Loan Agreement
A family loan agreement protects both parties to the transaction, even if you’re sure you don’t need it. With so much at stake, everyone benefits from clearly defined payback terms for future use. If the loan amount exceeds $10,000, the IRS requires a written agreement that sets out the terms of the loan and repayment and a minimum interest rate. Called the Federal Reasonable Rate (AFR). If you borrow or lend less than $10,000 between family members, you don’t have to worry as much about the potential tax consequences.
Creating an Agreement Document
A strong loan agreement not only protects both parties in the event of a discrepancy, it can also be legally required by the IRS if the loan amount exceeds $10,000. A comprehensive contract must contain the following information:
Loan amount (principal)
Loan interest rate, if applicable (interest must be calculated if loan amount exceeds $10,000) Fund transfer and repayment terms
Terms and conditions and repayment amount (e.g . fixed installments at regular intervals or in one installment at maturity) Consequences of non-payment, including lawsuits or foreclosures
Any additional costs related to the loan
Any changes to the loan terms
Signatures of both parties
If the amount borrowed is large or the loan For example, if the document is intended for the purchase of an important asset. Such as a house, you can consult an attorney for more information and have the document notarized for your protection. Putting these conditions in writing simplifies the execution of the contract and protects both parties from future misunderstandings. ์จ๋ผ์ธ์นด์ง๋ ธ์ฌ์ดํธ
Tax Implications
If the loan amount exceeds $10,000, the IRS requires a written agreement that sets out the loan. And repayment terms and a minimum interest rate, called the Federal Applicable Rate (AFR). This interest rate is updated monthly and the AFR varies depending on the loan term. Please note that the lender does not only require an AFR minimum for a family loan; They can charge a higher interest rate if they wish. However, the IRS treats the interest you must earn on a $10,000 loan as income.
So if you lend money to a family member but don’t know the financial implications. You could be paying tax on the amount of interest you should have earned on a five-figure loan, even if you didn’t. ‘T not charge the borrower interest.
If you don’t want to worry about your interest and income obligations, you might want to consider giving money to a family member. Beginning in 2022, you can give someone up to $16,000 without incurring gift taxes.
Default
Your contract should include a section setting out the consequences if a borrower fails to pay the family, either temporarily or permanently. It may seem awkward to contemplate this scenario, but it is important to get this agreement in writing before any money changes hands.
Records
Careful records are of great importance for a smooth and hassle-free family loan. From the start, monitor every transaction during trading, from the initial principal amount to every repayment. Whether it’s in a regular scrapbook, online spreadsheet, or system-specific accounting software. Not only will this benefit your relationship, but it will also help keep your finances organized and accessible in case you need to report anything to the IRS or future heirs.
Benefits of Accessing Family Loans
Regardless of Credit Rating: A family loan can be a useful solution for borrowers who have low credit ratings and would struggle to qualify for a traditional loan.
Low Interest Rate: Family loans may want to borrow money at a much lower interest rate than a traditional loan.
Negotiations are possible: In the case of loans to households, the borrower can discuss possible repayment solutions that are more creative than those offered by traditional lenders.
Disadvantages of Family Loans
Potential Relationship Damage: Poorly communicated expectations and implementation can lead to conflict and resentment, not only among those involved but also among family and close friends. IRS Disclosure
May Be Required: If the loan amount exceeds a certain threshold.
No Lenders: A family loan doesn’t help you build your credit with a responsible repayment history. Because your payments aren’t reported to credit bureaus. If that’s your primary goal, consider a personal loan, mortgage. Or small business loan that will report your payments to the appropriate credit bureaus. ๋ฐ์นด๋ผ์ฌ์ดํธ