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Borrowing money from a family member generally does not create taxable income if the transaction is a genuine loan that the borrower is expected to repay. However, taxes can come into play through the interest charged, IRS rules for below-market loans or a lender’s decision to forgive some or all of the debt. The IRS may impute interest when certain loans charge less than the applicable federal rate, and forgone interest can potentially be treated as a gift. Understanding these distinctions can help families structure loans more clearly and identify potential income- and gift-tax reporting requirements.
What Is a Family Loan?
A family loan is any loan that you make to a family member or friend. This can better be thought of as an interpersonal loan, made from one individual to another.
Most of the time a simple loan doesn’t rise to the level of tax concerns. Lending someone, say, $20 has no practical tax consequences. To be very clear, the IRS requires you to self-report any and all taxable transactions. However, the tax agency also has what it considers “de minimis” transactions, meaning transactions that are small enough to ignore without triggering tax consequences.
At small enough levels, giving and lending money does not trigger a tax event. The tax agency pays attention when you loan someone the down payment on a house, not when you lend them money to buy lunch.
However, family loans are often used to help with major expenses like buying a home, starting a business or covering unexpected financial needs. Unlike gifts, a family loan comes with an expectation of repayment, though the terms may be more flexible than a traditional loan.
Family Loan vs. Gift: What’s the Difference?
The main difference between a family loan and a gift is whether the recipient is expected to repay the money. A bona fide loan creates a genuine debtor-creditor relationship and an obligation to repay, while a gift is transferred without an expectation of repayment.
| Family Loan | Gift | |
|---|---|---|
| Repayment expected? | Yes | No |
| Generally taxable income to recipient when received? | No | No |
| Interest may apply? | Yes | No |
| Documentation useful? | Yes, particularly for establishing that a genuine debt exists | Yes, particularly for larger transfers |
| Gift-tax reporting possible? | Potentially, if interest is below market or debt is later forgiven | Potentially, if the transfer exceeds the applicable annual exclusion |
| Can affect lifetime estate and gift tax exclusion? | Potentially, for amounts treated as gifts | Yes, for taxable gifts above applicable exclusions |
For example, suppose a parent gives an adult child $50,000. If the parties agree that the child will repay the $50,000 under genuine loan terms, the principal generally is not taxable income to the child and is not treated as a $50,000 gift simply because the lender is a family member. The parent generally reports any taxable interest received.
If the same parent instead gives the child $50,000 with no expectation of repayment, the transfer is a gift. Because the 2026 federal annual gift tax exclusion is $19,000 per recipient, part of that gift may need to be reported on Form 709 and generally reduces the donor’s available lifetime estate and gift tax exclusion. Filing a gift tax return does not necessarily mean gift tax is immediately due.
A transaction can also begin as a loan and later create gift-tax consequences. For example, if a parent intentionally forgives some or all of a child’s remaining loan balance as a gift, the forgiven amount may be treated as a gift for federal gift-tax purposes. Similarly, charging less than the applicable federal rate on certain family loans can trigger the IRS below-market-loan rules and potentially treat forgone interest as a gift.
For that reason, the tax treatment depends on more than simply whether money changes hands between relatives. The parties’ intent, repayment obligation, loan terms, interest and subsequent treatment of the debt can all affect whether the transfer is respected as a loan or treated partly or entirely as a gift.
Family Loans Can Be Taxable Gifts
The big issue when it comes to family loans is determining whether this counts as a loan or a gift. If the IRS considers the transaction a gift, the lender may have to report it under the gift tax rules and it may apply to their annual and lifetime exemptions as appropriate. If the IRS considers this transaction a qualifying loan, then it will typically have few (if any) tax implications. It doesn’t count as income for the borrower, because they will pay this money back, nor does the loan count as a gift for the lender for the same reasons.
Run your numbers to see how changes in income could affect your tax bracket.
To qualify as a family loan, the transaction generally has to meet three criteria. You must have:
- A written or otherwise provable agreement between the parties
- A defined repayment schedule
- A minimum amount of interest
Without all three of these criteria, the IRS is very likely to consider your loan some form of a gift. Here are the reasons behind the IRS’ consideration:
1. Written Agreements Prove the Terms of a Loan
First, the IRS always wants to see proof of any tax claims that you make. If you tell the tax agency that this is a qualifying loan, it will want to see proof of a repayment schedule and an interest rate. Showing a history of repayment transactions may be enough to satisfy the IRS, but in most cases, they will want to see a written agreement defining these terms. Without that contract, the IRS is likely to consider this transaction so informal that it does not qualify as a loan.
2. Repayment Schedules Define Nonpayment
Second, without a fixed repayment schedule, there’s no way to tell the difference between when someone has defaulted on their loan and when you have gifted them the balance. This is critical because once someone defaults on a loan several tax implications apply. You can choose to forgive the loan as a one-time gift, at which point you file a gift tax return. You could also forgive the loan and write it off as a loss on your taxes, at which point the recipient may have to claim the amount forgiven as taxable income.
What the IRS does not allow is for you to leave the loan indefinitely unpaid. At a certain point, an unpaid loan becomes a gift. The IRS requires a fixed repayment schedule so that you and more importantly they can tell the difference.
3. Interest Can Be Considered a Gift
Finally, the IRS requires you to charge a minimum interest rate. Unlike the first two conditions, giving someone an interest-free loan does not automatically turn the entire transaction into a gift. With written terms and a fixed repayment plan, it can still be treated as a loan. However, the IRS may treat the interest you did not charge as a gift to the borrower.
The IRS publishes Applicable Federal Rates (AFRs), which establish minimum rates for different types of loans. If you charge less than the applicable rate, the difference can be treated as foregone interest.
That can create two separate tax issues. First, you may have to report imputed interest as taxable income even though you did not actually receive it. Second, the foregone interest treated as a gift may count toward your annual gift tax exclusion and, depending on the amount, could require a gift tax return. Filing a gift tax return does not necessarily mean you will owe gift tax.
What Are the De Minimis Exceptions?
You do have to report the money unless the loan is small enough to trigger one of the exceptions. The IRS gives two de minimis exceptions for interest on family loans, which are:
The $10,000 De Minimis Exception
The IRS does not require you to charge interest for loans under $10,000. You can extend a loan of that size interest-free with no tax consequences as long as the loan wasn’t used to purchase income-generating assets.
For example, if someone borrows $10,000 to help with the down payment on a home, you don’t have to charge interest. If they use that money toward the down payment on a property they rent out, you do have to charge interest.
Like gifts, loan rules apply to the sum of all lending over the course of a year. So if at any time, the borrower owes you more than $10,000, this exception will no longer apply and you must begin charging interest or reporting it as a gift.
The $100,000 De Minimis Exception
If the total sum of lending is less than $100,000, the IRS allows you to charge interest based on the lesser of either the AFR rate or the borrower’s net investment income for the year. If their investment income was $1,000 or less, the IRS allows them to charge no interest.
For example, say a family member borrows $100,000 from you. At the time of writing a long-term AFR might require you to charge them at least $3,840 per year of interest. However, say they had $1,500 in total investment income for the year. You can use that investment income to define the interest on their loan, reducing it to $1,500 for the year. If they had $900 of investment income for the year, you could charge them no interest at all without triggering gift tax consequences.
Bottom Line
A genuine family loan generally is not taxable income to the borrower because the money comes with an obligation to repay it. The lender, however, generally owes income tax on interest received, and below-market loans can create imputed-interest and potential gift-tax consequences. Forgiving a family loan can create additional gift or canceled-debt considerations depending on the circumstances.
Tips for Tax Planning
- Before taking money from a family member, or any other source, you may want to first consult with your financial advisor to see how it might impact your finances. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- This article discusses what to do if you don’t want your loan to count as a gift. But what if you do? In that case, it’s worth reading up on how to minimize the tax consequences of making large gifts.
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