Short term bridge loan to child for house purchase until mortgage closes

Forum|Forum|4 years ago
August 19, 2021
2 replies
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My daughter and husband are buying their first house. Competitive situation so they want to bid as is with 2 week closing. Is there any issue with me loaning them $200,000 for 2-4 weeks until their mortgage proceeds are received? Assume there are no potential gifting issues with loan documentation, AFR rates, etc. if the loan is repaid that quickly? Thanks

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Anonymous_

Employee

There should not be any issues with respect to federal taxation assuming the loan is documented and the short-term AFR is charged (which should result in total interest received of well under $50 for that short time period).

Opus 17

Employee

The issue will be more with the bank. If you claim this was a gift, it might be mortgage fraud if you require repayment. If you disclose it was a loan, the bank making the mortgage on the new home might worry about their ability to repay the mortgage. Make sure you are transparent with the lender.

For IRS purposes, the IRS requires that "loans" be made in a businesslike manner, including charging interest, even to family. If you don't charge interest, you must report "imputed interest income" -- taxable interest income on your tax return equal to the amount of interest your borrower would have paid at the relevant federal minimum interest rate. That rate is less than 2% right now, so the interest on $200,000 for 14 days would be less than $153.

guido1Author

Thanks! Will charge them the short term AFR rate and have them sign a note to document. They will apply for cash out refi mortgage after house closes so the lender will be aware the proceeds will repay my loan. Thanks for you response. Appreciated!