Family Loans: Should You Lend It or Give It Away?

It may be better to give than to receive—but what about to lend?

The desire to extend a financial helping hand to family members—whether in the form of a down payment on a new home, a bridge loan when times turn tough, or even an advance on an inheritance—is natural.

The question is: What's the best way to help? Should it be an outright gift? Or a loan? The answer will depend on your circumstances, because there may be strings attached.

Start by considering the following.

Gifts of $18,000 or less per recipient fall under the annual "gift exclusion" for tax purposes. If your gift exceeds that amount, you must report it to the IRS on Form 709. 

Don't let that put you off, though. You won't necessarily owe taxes on bigger gifts, assuming you haven't exhausted the lifetime gift tax exemption of $13.61 million per individual ($27.22 million for a married couple), which is the total amount you can give away tax-free during your life. Be aware, though, that the exemption will be cut in half at the end of 2025 unless Congress extends this provision. 

If you have significant means, and you're primarily concerned with your tax exposure, then it may be prudent to give money or other assets to family members before this window closes, and people should be meeting with their attorneys now. 

Keep in mind, too, that if you have financial assets that have decreased in value, you could consider gifting them while they're down, as any future appreciation would occur in the recipient's estate.

Those who don't want to give an outright gift could consider an intrafamily loan. This kind of arrangement can encourage fiscal discipline by obliging the recipient to make regular repayments. 

Before you extend a loan to family, however, be aware that it's not as simple as just writing a check. The IRS mandates that any loan between family members be made with a signed written agreement, a fixed repayment schedule, and a minimum interest rate. (The IRS publishes Applicable Federal Rates (AFRs) monthly.) 

Should you fail to charge an adequate interest rate, the IRS could treat the interest you failed to collect as a gift. What's more, if the loan exceeds $10,000 or the recipient of the loan uses the money to produce income (such as using it to invest in stocks or bonds), you'll need to report the interest income on your taxes.

There's also the question of delinquency to consider. When a family member can't repay a loan, the lender rarely reports it to a credit bureau, never mind a collection agency. However, should the lender want to deduct a bad loan on their taxes, the IRS requires proof of an attempt to collect the delinquent funds. 

Conversely, if the lender wants to forgive the loan, the unpaid amount will be treated as a gift for tax purposes. Then, the borrower may owe taxes on the remaining unpaid interest. (The rules are even more complicated if the loan is considered a private mortgage, so it's best to consult a qualified tax advisor or financial planner before finalizing the details.)

Whatever the case, you shouldn't attempt to disguise a gift as a loan. An intrafamily loan needs to have a formal structure or else the IRS will consider it a gift. This may be a significant issue if you've already used your lifetime gift exemption and, if so, may trigger an immediate tax. 

With the current unified estate tax and gift tax exemption limits of 13.61 million per individual, this is often not an issue. However, should the exemption be lowered from 2026, this could be significantly more problematic. 

Be that as it may, lending a large sum to a family member can help her or him save a tidy sum in interest payments over the life of the loan.

Intrafamily loans, which can be offered at rates lower than those for mortgage and personal loans, can help borrowers save big on interest.

In the end, whether to give a gift or extend a loan may come down to the strength of your familial relationships and the nature of the individuals involved. Whichever path you take, communication is key, particularly when setting expectations.