Loan repayment, tax ramifications?

M

Mark2364

New Member
Jurisdiction
Arizona
In Arizona, a year ago, I loaned my brother $80K, so he could buy a house.
Now, he must sell it. The escrow company will issue a check to me for the $80K.
It is repayment of a non-interest loan.
How can I make sure that there are no state or fed tax ramifications?
Thanks.
Mark2364
 
Mark2364 said:
In Arizona, a year ago, I loaned my brother $80K, so he could buy a house.
Now, he must sell it. The escrow company will issue a check to me for the $80K.
It is repayment of a non-interest loan.
How can I make sure that there are no state or fed tax ramifications?
Thanks.
Mark2364
Click to expand...

This is a below market loan to which the rules of the Internal Revenue Code (IRC) § 7872 apply. That section details the treatment of below market loans. You made the loan to your brother interest free, with the result that the foregone interest you otherwise would have gotten is a gift to him. Under § 7872, that means that interest is computed at the applicable federal rate (AFR) and that amount of interest is treated as (1) a gift you made to your brother and then (2) your brother then pays you that same amount in interest. That interest you are deemed to receive is known as imputed interest

Assuming that your total gifts to your brother, including this imputed gift, do not total more than $15,000 for the year you won't have any gift tax issues to worry about. However, pay attention to the other gifts you make to him during the year because if the total of all the gifts combined exceed $15,000 you will have to file a gift tax return and reduce you lifetime unified credit against gift and estate taxes or, if you've exhausted that credit, you'll have gift tax to pay.

The imputed interest is included in your income like any other interest you receive. However, so long as the total loans between you and your brother are less than $100,000, the interest income you have will be limited to no more than your net investment income for the year.

You aren't going to be able to avoid the application of these rules.

Arizona residents compute their state income tax the same way they do for federal income tax, with a few adjustments that do not impact this.
 
Mark2364 said:
How can I make sure that there are no state or fed tax ramifications?
Click to expand...

You can't stop the tax thieves from doing anything.

You CAN consult a good CPA and ask if it is possible to limit how badly the tax thieves will assault your $80K.
 
It's not the $80,000 that will be assaulted, it's the interest.

The 2018 for imputed interest for loans of less than 3 years was 1.78%.

Your one year imputed interest on $80,000 is $1424.

The tax on $1424 could be just a couple of hundred depending on your tax bracket.

Hardly anything to lose any sleep over.
 

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