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    imadthegreat's Avatar
    imadthegreat Posts: 50, Reputation: 1
    Junior Member

    Feb 5, 2015, 07:45 PM
    Taxes on getting back money you loaned
    I'll be lending to someone in the family outside of US(I am a US citizen living in US). The amount is reasonably large. The person is going to return me the money in chunks of $5000 each. I don't need advice on whether I should lend it or not, but I am trying to find out if I'll be taxed on money which is from my saving (after paying taxes - I am a salaried person) and I am just lending it, when I get back. I'll be earning $0 in interest. He will simply return me what I lend him. No more, no less.
    ebaines's Avatar
    ebaines Posts: 12,132, Reputation: 1307

    Feb 7, 2015, 08:36 AM
    You will not owe taxes on the return of the principal. However, a word of advice: you should have a written contract for this loan for two reasons:

    1. Without a contract specifying the payment terms and duration of the loan (i.e, the final end date when any outstanding principal is due) the loan to your friend may be construed as a gift, and you could be hit with gift tax requirement.

    2. Without a contract if your friend defaults, or is hit by a bus and his estate defaults, you will have little to no ability to get your money back.
    ScottGem's Avatar
    ScottGem Posts: 64,966, Reputation: 6056
    Computer Expert and Renaissance Man

    Feb 8, 2015, 07:32 AM
    If the loan repayment will involve interest then you will need to report the interest as income.
    ebaines's Avatar
    ebaines Posts: 12,132, Reputation: 1307

    Feb 8, 2015, 08:44 AM
    After some research, I need to amend my previous answer.

    Any personal loan that has an interest rate that is below the market rate is called a "below-market" loan. The IRS treats this as if you actually received the interest from the borrower and then made a gift of it back to the borrower. So - you will have to report the foregone interest as income, and if the amount of forgiven interest is large enough there may be gift-tax consequences. This assumes that the amount of the loan is greater than $10K.

    For more info see the section on "Below-Market Loans" here: Publication 550 (2013), Investment Income and Expenses
    joypulv's Avatar
    joypulv Posts: 21,593, Reputation: 2941
    current pert

    Feb 8, 2015, 02:07 PM
    A loan to an immediate family member (I think immediate, it's been a while) can charge less than market rates. Rates are set monthly by the IRS, and there are different rates depending on the term.
    They are called 'intra-family' loans and I have used them twice. Mine ran around half the going fixed rate for a typical mortgage at the time (but you don't have an option for a fixed rate).

    I hope they still exist. Last time I looked I couldn't find them.
    ebaines's Avatar
    ebaines Posts: 12,132, Reputation: 1307

    Feb 11, 2015, 03:19 PM
    I don't believe it makes a difference whether the loan is to immediate family or not. The IRS does use the term "intra-family loans," I assume because the majority of low-rate personal loans are between family members, but it's a catch-all phrase and the rules apply to loans to friends or whomever under the same terms.

    FYI - the current applicable federal rates are 0.48% for short-term loans (up to three years), 1.39% for intermediate term loans (3 - 9 years) and 2.41% for loans with terms greater than nine years. They update the rates every month - see:
    joypulv's Avatar
    joypulv Posts: 21,593, Reputation: 2941
    current pert

    Feb 12, 2015, 05:50 AM
    AFR! That's it! Thanks ebaines. Friends ask me about this every once in a while. And I didn't know that it applies to non-family too.

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