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Family Member LoansOverview article from Smart Money (last updated 12-13-2007) Loans Among Family Members. Although an interesting summary, the article doesn't mention the applicable Internal Revenue Code - so follow-up to specifics is impossible without more research. IRC section 7872 contains the additional information needed to examine the issues and exceptions of loans to family members.
Applicable Federal Rates:
Other possibly relevant documents
TITLE 26--INTERNAL REVENUE CODE
Subtitle F--Procedure and Administration
CHAPTER 80--GENERAL RULES
Subchapter C--Provisions Affecting More Than One Subtitle
Sec. 7872. Treatment of loans with below-market interest rates (a) Treatment of gift loans and demand loans (1) In general
For purposes of this title, in the case of any below-market loan
to which this section applies and which is a gift loan or a demand
loan, the forgone interest shall be treated as--
(A) transferred from the lender to the borrower, and
(B) retransferred by the borrower to the lender as interest.
(2) Time when transfers made
Except as otherwise provided in regulations prescribed by the
Secretary, any forgone interest attributable to periods during any
calendar year shall be treated as transferred (and retransferred)
under paragraph (1) on the last day of such calendar year.
--- skip (c) Below-market loans to which section applies (2) $10,000 de minimis exception for gift loans between
individuals
(A) In general
In the case of any gift loan directly between individuals,
this section shall not apply to any day on which the aggregate
outstanding amount of loans between such individuals does not
exceed $10,000.
--- skip (d) Special rules for gift loans (1) Limitation on interest accrual for purposes of income
taxes where loans do not exceed $100,000
(A) In general
For purposes of subtitle A, in the case of a gift loan
directly between individuals, the amount treated as
retransferred by the borrower to the lender as of the close of
any year shall not exceed the borrower's net investment income
for such year.
--- skip (E) Net investment income
For purposes of this paragraph--
(i) In general
The term net investment income has the meaning given
such term by section 163(d)(4).
(ii) De minimis rule
If the net investment income of any borrower for any
year does not exceed $1,000, the net investment income of
such borrower for such year shall be treated as zero.
--- skip (f) Other definitions and special rules ... (2) Applicable Federal rate ... (B) Demand loans
In the case of a demand loan, the applicable Federal rate
shall be the Federal short-term rate in effect under section
1274(d) for the period for which the amount of forgone interest
is being determined, compounded semiannually.
(3) Gift loan
The term ``gift loan'' means any below-market loan where the
forgoing of interest is in the nature of a gift.
(4) Amount loaned
The term ``amount loaned'' means the amount received by the
borrower.
(5) Demand loan
The term ``demand loan'' means any loan which is payable in full
at any time on the demand of the lender. Such term also includes
(for purposes other than determining the applicable Federal rate
under paragraph (2)) any loan if the benefits of the interest
arrangements of such loan are not transferable and are conditioned
on the future performance of substantial services by an individual.
To the extent provided in regulations, such term also includes any
loan with an indefinite maturity.
TITLE 26--INTERNAL REVENUE CODE
Subtitle A--Income Taxes
CHAPTER 1--NORMAL TAXES AND SURTAXES
Subchapter B--Computation of Taxable Income
PART VI--ITEMIZED DEDUCTIONS FOR INDIVIDUALS AND CORPORATIONS
Sec. 163. Interest (4) Net investment income
For purposes of this subsection--
(A) In general
The term ``net investment income'' means the excess of--
(i) investment income, over
(ii) investment expenses.
(B) Investment income
The term ``investment income'' means the sum of--
(i) gross income from property held for investment
(other than any gain taken into account under clause
(ii)(I)),
(ii) the excess (if any) of--
(I) the net gain attributable to the disposition of
property held for investment, over
(II) the net capital gain determined by only taking
into account gains and losses from dispositions of
property held for investment, plus
(iii) so much of the net capital gain referred to in
clause (ii)(II) (or, if lesser, the net gain referred to in
clause (ii)(I)) as the taxpayer elects to take into account
under this clause.
Such term shall include qualified dividend income (as defined in
section 1(h)(11)(B)) only to the extent the taxpayer elects to
treat such income as investment income for purposes of this
subsection.
(C) Investment expenses
The term ``investment expenses'' means the deductions
allowed under this chapter (other than for interest) which are
directly connected with the production of investment income.
(D) Income and expenses from passive activities
Investment income and investment expenses shall not include
any income or expenses taken into account under section 469 in
computing income or loss from a passive activity.
(E) Reduction in investment income during phase-in of passive
loss rules
Investment income of the taxpayer for any taxable year shall
be reduced by the amount of the passive activity loss to which
section 469(a) does not apply for such taxable year by reason of
section 469(m). The preceding sentence shall not apply to any
portion of such passive activity loss which is attributable to a
rental real estate activity with respect to which the taxpayer
actively participates (within the meaning of section 469(i)(6))
during such taxable year.
2008-06-10 Tags: Taxes Back to EstatesAndTrusts
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