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March 11th, 2009

Be Tax Smart When Lending to Loved Ones



Loaning money to a loved one has always had the potential of getting complicated. But if you’re in the position to do so, make sure you do it in a way that allows you to benefit as well. To avoid complicated tax laws, charge an “IRS-approved applicable federal rate (AFR)” on top of the loan.

The currently low rates for fixed terms are as follows:

* 0.72% for “short-term” loans of up to three years.

* 1.93% for “midterm” loans over three years, but not over nine years.

* 3.49% for “long-term” loans over nine years.

AFRs are updated monthly in response to ever-changing bond market conditions. Today’s super-low AFRs reflect the current super-low rate environment, which may not last much longer. AFRs for each month are published in Internal Revenue Bulletins and can be found at IRS.gov. With a term loan, the AFR on the month you make the loan applies for the entire term.

To avoid a loved one mis-interpreting your loan as a gift, make sure the entire agreement is put into writing. This will also guarantee the IRS respects your deal down the road.

Click here for additional information on AFRs.

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About the HSH Blog

HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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