Original MDTAXES Forum

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Sep 25, 2003 - 9:43AM

Re: Gifts, etc.

IRC Sec 7872(d)(1) addresses loans between individuals, and permits special treatment of loans up to $100,000. The amount of "imputed" interest on such a loan is limited to your (the borrower's) actual net investment income for any year. Imputed interest is calculated using the interest rate that the IRS forces you to use if the loan has no rate, or a below-market-rate of interest (.00001% is going to trigger this rule).

If your net investment income for a year is less than a $1,000, then the imputed interest is considered to be zero. If the imputed interest on a $100,000 were to be 4%, then there would be preliminary imputed interest of $4,000 (this presumes that your parents gave you a gift of $4,000, which you then used to pay them the interest on the loan. This "pretend" or "imputed" interest is an expense to you and income to them). If your actual net investment income was only $900, then the imputed interest would be zero for that year, and your parent(s) would not have to report any interest income. If your net investment income were over $1,000, but less than $4,000, then they would have to report interest income up to the $4,000. The actual imputed interest rate comes from IRS rates called AFR's, and the choice of the correct rate can be complicated.

Needless to say, you and your parents need some in person professional advice on this before you proceed. There are a number of other requirements, and considerations that may influence your decision, including possible gift tax consequences to your parents.

Contact a CPA in your area for guidance on this! Ain't the tax law wonderful?

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Replying to:

I am interested in purchasing a house, but my folks want to help with about 100Gs for the downpayment. What is the best way for them to give this to me? 1. A one time gift of 100Gs into my bank account, 2. A loan, 30 year fixed interest of .00001%, or 3. transfer the money to my Swiss bank account from which I write checks from? Please discuss these and other alternatives.

Zip Code: garyd@davisandbrandel.com