Ask Experts Questions for FREE Help !
Ask
    imadthegreat's Avatar
    imadthegreat Posts: 53, Reputation: 1
    Junior Member
     
    #1

    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: 12,131, Reputation: 1307
    Expert
     
    #2

    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
     
    #3

    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: 12,131, Reputation: 1307
    Expert
     
    #4

    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: 21,591, Reputation: 2941
    current pert
     
    #5

    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: 12,131, Reputation: 1307
    Expert
     
    #6

    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: http://www.irs.gov/pub/irs-drop/rr-15-03.pdf
    joypulv's Avatar
    joypulv Posts: 21,591, Reputation: 2941
    current pert
     
    #7

    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.

Not your question? Ask your question View similar questions

 

Question Tools Search this Question
Search this Question:

Advanced Search

Add your answer here.


Check out some similar questions!

My ex loaned me money and I paid him back in cash and now he is taking my to court? [ 1 Answers ]

My ex loaned my 4000.00. I paid him all but 300.00 and he is wanting to take me to court for the full 4000.00. I paid him back in cash how can I prove I paid him?

Stupid me. I loaned my brother money. [ 6 Answers ]

Hello, I loaned my brother 10K to pay for his wedding. That was 15 years ago. I received $700 a month ago towards the debt, from what my brother called "his" money. He had a failed business and had to declare bankruptcy. His home had to be put in his wife's name, they have sold that home, and the...

Loaned money to family over 10 yrs ago [ 2 Answers ]

Can they go to court and get it back? The money was borrowed sometime in 2000. It was from and Uncle to a Nephew. He borrowed $16,500 and never paid a cent! Can the Uncle try and get his money back or is it too late?

Loaned Money To A Friend And He Skipped Out Can We Sue? [ 18 Answers ]

Hello! I hope someone can help me. Four months ago we took a friend into our home who had been evicted from his apartment (after his roommate took his rent money and didn't pay the rent). We fed him, housed him (never charged him a dime) and loaned him $1200 he said he needed for college...

Pay me back loaned money [ 2 Answers ]

How do I get reimbursed for money I loaned a family member who signed a NOTE to pay me back with interest? Their house is for sale and I would like to attach a lien on the house if that is a possibility. How do I do this?? They live in a different County, but; the same State. :confused:


View more questions Search