Lending to Family Members? Know the Tax Rules
NEW YORK (BankingMyWay) -- 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.
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: