My brother got an amazing loan to buy his house from dad for $200,000 but he only pays $150 a month ($100 capital + $50 interest). My question is, is this legal? Doesn't the IRS see this as more of a gift than a loan? What is the minimum amount he should pay a month? He says it's a 30 year loan.

  • 3
    It’s not a thirty-year loan if he’s only repaying $100 of the capital per month, because he will only have repaid $36,000 when the thirty years are up.
    – Mike Scott
    Sep 14, 2018 at 18:26
  • $50 interest / month on $200k loan = ~0.3% interest rate, when a market interest rate would be about 10x that. Smells like a gift to me. Sep 14, 2018 at 18:29
  • It's a good question. But this is not a "mortgage", it is just an "arrangement" between the two parties.
    – Fattie
    Sep 15, 2018 at 4:41
  • "He says it's a 30 year loan." you know when your brother says something incredibly silly, and you just sock him in the face like when you're little kids? This is one of those times :) :)
    – Fattie
    Sep 15, 2018 at 4:41

2 Answers 2


My question is ...is this legal? Doesn't the irs see this as more of a gift than a loan?

Yes, it's legal, but the IRS views very low interest rates as a gift. They'll take the acceptable minimum rate (currently ~3%) and consider the difference between rate charged and that rate as a gift. Similarly, if he is forgiving loan principal over time, that is considered gift as well.

In this case, the minimum interest is well below the annual gift tax exclusion ($15,000 for 2018), so unless he's also giving other gifts there is no gift tax liability.

What is the minimum amount he should pay a month?

A traditional $200k 30-year with a 0.3% rate would come out to a payment of ~$580/month, but we don't know the specifics, it could be that they intend to increase payment amounts over time, so they should just pay whatever they agreed to.

  • 3
    This is a common way to give real property to a child while avoiding gift taxes. You make the face price the lowest the IRS will accept, keep any forgiven principal and any imputed interest under the annual gift tax exclusion, and give them the house over time. Sep 14, 2018 at 22:01
  • Each month, the IRS publishes the 'Applicable Federal Rate' (AFR) which they use as a reference for comparing loans between related parties. They do short, mid and long term calculations. If the 'family' loan rate is lower than the applicable AFR, it may result in a taxable event. Sep 15, 2018 at 19:10

The IRS has rules regarding "Below Market Loans"

Below-Market Loans If you make a below-market gift or demand loan, you must report as interest income any forgone interest (defined later) from that loan. The below-market loan rules and exceptions are described in this section. For more information, see section 7872 of the Internal Revenue Code and its regulations.

If you receive a below-market loan, you may be able to deduct the forgone interest as well as any interest you actually paid, but not if it is personal interest.

The link (to read more) is 60 or so lines down the page or do a CTRL-F on "Below Market Loans"


You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .