“The note is for $150,000 at 6% interest. There is a balloon payment in August. The house is now worth around $100,000. What is the best way for the transfer?”---->First of all, your parents need to file a gift tax return, Form 709 since the amount of the gift for you exceeds the annual $13,000 tax-free gift limit. However, unless your parents made a huge gift exceeding $1.13,000 million( I assume that you are the only recipient of the gift) before or in 2010 alone, your parents are NOT subject to gift tax. So, I guess it's prudent to send in that Form 709 every time your parents make a transaction with a family member over $13,000 per year. You, as agift recipient, are not subject to gift tax UNLESS you agree to pay the gift tax as a condition of receiving the gift( if applicable). However, you need to report the interest income generated from the gift, note, as your gross income on your return, OK?