Originally Posted by Beanhohn
I bought a house for my sister for which she is repaying me at a low interest rate. She now wants to refinance through a bank to pay me off. Is the payment from the bank to me for the loan payoff considered taxable income? I did not finance...just paid cash.
I bought a house for my sister for which she is repaying me at a low interest rate.====>>>> To determine what interest rate to charge, you’ll need to go to IRS.gov and look up the "applicable federal rate" for the month and year in which you finalize the loan.There are significant (and complicated) tax consequences if you don’t charge at applicable federal rate. Failure to do so could create a gift, or the IRS could deem the uncharged interest to be income and tax it. If you want to lend your sister a large sum, you have to do it right to avoid incurring gift-tax liability.For example, you must properly document the loan. You need to have to work with a title company to create the required deed of trust documents and record these with the county in which the residence is located. She should also sign a promissory note that details how the loan is to be repaid to you.the formal loan document should state the loan’s interest rate, term and transferability.
.in addition, since as you never actually have possession of the interest income, the tax law assumes that the lender, you, makes annual gifts to her equal to imputed interest. So aslongas the imputed interest amount exceeds $14K,for 2014, you must file form 709, however, she, as a done, is not subject o any tax liability.
EXCEPTION; no interest is imputed on a gift loan of $100k or less if the borrower's net investment income for the year doesn’t exceed $1K.Net investment income is dividends, taxable interest income, or capital gain or etc.
She now wants to refinance through a bank to pay me off. Is the payment from the bank to me for the loan payoff considered taxable income? I did not finance...just paid cash.
========>>>>>>>As mentioned above.