Quick loan from parents - any tax consequences?

months. Would I have to report this to the IRS in any way? I do not plan on paying back with any interest.

You do not have anything to report.

If the loan were a gift instead of a loan, your parents would have to file a gift tax return but not pay any tax (assuming your spouse, if any, is not involved).

However, you are contemplating what is called a "below-market gift loan", meaning the (imputed) interest on the loan is a gift from your parents to you (and in this case well below any gift tax filing requirements).

As a result, your parents will need to report some taxable interest income.

There is an exception for loans under $10K, which would not apply to your case.

See IRS Pub 550:

"A demand loan or gift loan that is a be- low-market loan is generally treated as an arm?s-length transaction in which the lender is treated as having made:

The borrower is generally treated as transferring the additional payment back to the lender as interest. The lender must report that amount as interest income.

The lender?s additional payment to the bor- rower is treated as a gift,[...] or other payment, depending on the substance of the transaction. [...] These transfers are considered to occur an- nually, generally on December 31."

Mark, What about this exception (from the same Publication):

Limit on forgone interest for gift loans of $100,000 or less.

For gift loans between individuals, if the outstanding loans between the lender and borrower total $100,000 or less, the forgone interest to be included in income by the lender and deducted by the borrower is limited to the amount of the borrower's net investment income for the year. If the borrower's net investment income is $1,000 or less, it is treated as zero. This limit does not apply to a loan if the avoidance of federal tax is one of the main purposes of the interest arrangement.

lender and borrower total $100,000 or less, the forgone interest to be included in income by the lender and deducted by the borrower is limited to the amount of the borrower's net investment income for the year. If the borrower's net investment income is $1,000 or less, it is treated as zero. This limit does not apply to a loan if the avoidance of federal tax is one of the main purposes of the interest arrangement.

Good catch...

Without taking the time to look up and read the actual code and regs, I'd have to say that's a little ambiguous. It seems to deal with the case where the borrower is actually deducting the "gift" interest. I was assuming that this loan was for personal purposes, with non-deductible interest for the borrower, but the OP doesn't state one way or the other.

In any case, how is the lender supposed to know what the borrower's net investment income is, to point of signing a return under penalty of perjury? There is no requirement for the borrower to provide a copy of their tax return to the lender, is there?

As a practical matter, in this situation I'd advise writing up a simple one or two paragraph loan note (I'm sure samples are available on the web) and explicitly including interest similar to current bank savings rates on demand accounts. That would make the whole "below market gift loan" issue go away, and the parents would have a token amount of explicit interest to report, probably lower than the federal rates.

I think there are other benefits to having a written agreement with explicit interest, even between family members. It could help if there was the unexpected demise of one of the parties, or if the debt turned into a non-business bad debt (uncollectible), plus it establishes the date(s) of the interest income and expense, as opposed to Dec. 31st.

I would agree that a little paperwork might go a long way to avoiding problems in the future. Although I doubt even the federal rates for imputed interest would come to much on a 4 month $30,000 loan, in the current interest rate environment.

It is recommended to write a loan note stating principal, interest rate (as zero), due date, and collatoral.

According to

When the lender (the parents) files their 2013 tax return they will then determine how much imputed interest to include in their income tax or gift tax return. I'm not sure on which tax return the imputed interest goes onto.

Good points.

It looks like the minimum applicable interest rate for short term notes is .21%. That would come out to $5.25 per month.

___ Stu