How to Charge Interest on Family Loans

Loans over $12,000 come with interest or gift taxes.


Dear Alpha Consumer,

In your article When a Relative Wants a Loan, you talked about the interest rates that should be charged on loans over $12,000. You mentioned the rate set by the Treasury Department was 1.63 percent or higher.

I received a personal loan from my parents to purchase a house and we want to document it in a loan with the appropriate interest. Where do I find out the proper interest rate? Our transaction was in December.

While your parents may want to charge your a higher interest rate for their own reasons, they must at least charge you the minimum rate set by the Treasury Department in order to avoid gift taxes. (Any gift over the amount of $12,000 -- that limit will go up in 2009 -- is subject to gift taxes.) As long as the minimum rate is charged, then the money is considered a loan, not a gift, and you avoid those taxes.

To figure out what that minimum rate is, visit the IRS website and search for "applicable federal rates" -- to make it easy for you, just follow this link. In December, when you received the money from your parents, the required rate was 1.36 percent. But because the rate fluctuates month to month and the calculations get complicated, most financial experts recommend getting professional help when dealing with such large loans. And, as always, you want to be sure to put the loan in writing so you and your parents are clear on its terms.