BERKELEY HEIGHTS, N.J. ( TheStreet) -- Family loans can be appealing, given the current miserably low interest rates on savings accounts coupled with tight credit conditions for borrowers, but there are serious tax and relationship implications to consider first.For example, let's look at a wealthy parent with a child in their late 20s or early 30s. The parent has excess cash earning close to zero in a money market account. Their adult child would like to buy their first home, since they're more affordable than during the crazy days of the housing bubble. But they are having difficulty getting a mortgage due to stricter lending rules.
|Family loans typically come with low interest but serious tax and relationship implications.|
- A promissory or mortgage note that bears a minimum interest rate equal or greater than AFR (the long-term rate is now 2.67%) and spells out its term and payment dates, meaning it must be decided whether payments are to be monthly, quarterly or annually.
- A mortgage or deed of trust properly recorded with correct governmental authority, which makes the mortgage secured and gives the lender the legal right to foreclose.
- The lender records mortgage interest as income on Schedule B of their return.
- The borrower can deduct mortgage interest expense as an itemized deduction.
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