A new study from National Family Mortgage, a company that specializes in servicing interfamily loans, says that Baby Boomers are lending a large share of their retirement to their adult children and aging parents and that tax implications may ensue. Most people don’t think about the tax on a family loan, but the fact is that the law requires interest on such loans to be reported or the exclusion that protects family members from such taxes. People making loans to family members are advised to speak to a tax professional if only to avoid any misunderstanding with the IRS. For more on this continue reading the following article from TheStreet.
The next time Uncle Ralph hits you up for a loan to rehab that ’57 Chevy or your kids need some cash for a down payment on a new fixer-upper, pay close attention to an otherwise overlooked issue — taxes.
It’s hard to say exactly how many Americans borrow money from family members, but an Australian study says the average Aussie borrows about $2,400 annually from family members, a fairly staggering sum when you think about it.
The study, from the financial services firm Commbank Kaching, says the most common reason for borrowing money is an unforeseen “emergency situation” (49% of study respondents) or just “running out of money” before payday (26%).
When it comes to hitting up family members, women are roughly twice as likely to ask for a loan, 18-24-year-olds are the demographic most likely to borrow money, and city dwellers are more likely than suburban or rural residents to ask for a loan, according to the study.
Moving back to the U.S., some analysts think that Baby Boomers are most likely to be hit up for a family loan, and when that happens, Boomers are blissfully ignorant of the tax impact of providing that financial support to kith and kin.
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That’s the basis for a report from Boston, Mass.-based National Family Mortgage, a service provider for inter-family home loans (yes, there are companies that actually do this). NFM says it has funded $42 million in mortgage loans between family members, from $18,500 to $1,350,000.
The firm conducted a survey, in collaboration with Harris Interactive, that tracked the tax implications of family loans, a serious issue for Baby Boomers these days.
“Several other recent, highly publicized surveys have reported that US Baby Boomers are providing significant financial support to both their adult children and aging parents,” says the report. “While financial experts have expressed concern over Boomers sacrificing their own retirement needs in order to help relatives, unsuspecting Boomers may also be inviting IRS tax troubles as a result of this good will.”
Specifically, National Family Mortgage found that:
- 64% of U.S. citizens aged 45 and above are in the dark over a lender’s obligation to report any interest earned from specific family-to-family loans.
- 46% of Americans aged 45-to-54 are unfamiliar with the Internal Revenue Service’s annual gift tax exclusion (which currently stands at $13,000 per person), a potential big tax deduction for family lenders.
The key is for family members who loan money to consult with a tax professional before writing any checks.
“Intrafamily loans and financial gifts with relatives can be a win-win for both sides, but absolutely must be structured and documented properly to prevent misunderstandings with the IRS,” explains Timothy Burke, National Family Mortgage’s CEO and founder. “Anyone considering a loan or a financial gift with a relative or friend should first consult with their preferred tax professional, financial planner, or attorney, to ensure the transaction is a successful one.”
The next time you make a family loan, go ahead and factor in your brother-in-law’s ability to repay that loan, and factor in what Uncle Sam might say about the loan, as well.
You’ll be glad you did, especially during tax season.
This article was republished with permission from TheStreet.
