Loans to Family Members, Part 2
Last week I mentioned the income tax problems associated with a loan to a family member. It is important to realize that market interest rates are determined by reference to what are known as "applicable federal rates" for short-term (3 years or less), mid-term (between 3 and 9 years) and long-term (more than 9 years) loans. What's amazing about our current climate is that these rates (published by the IRS each month) are incredibly low. In the loans to family members context, this means a couple of things:
1. It's easier than ever to make a "market" loan at an interest rate that is not at all burdensome to the borrower. For instance, the February 2009 short-term applicable federal rate was less than 1% -- it was 0.60%! (The March 2009 rate is almost as low -- it's 0.72%. See this page for more information.)
2. If you do want to make a below-market interest rate loan (or a no interest rate loan), the income tax and gift tax consequences will likely be minimal.
