Buying land from family at 0% interest - imputed interest and gift tax implications?

The 0% interest loan structure you're considering does involve imputed interest rules, but you're thinking along the right lines with the gift tax exclusion. Here's what you need to know: When a loan is made below the AFR (Applicable Federal Rate), the IRS considers the difference between the AFR and your actual rate (0% in your case) as imputed or "phantom" interest. This gets treated as if your aunts received interest payments from you (which they'd report as income) and then gifted that same amount back to you. For the gift tax part - yes, each aunt can give you up to $18,000 per year without reporting it (2024 annual exclusion), and if you're married, they can each give up to $18,000 to your spouse too. So potentially $36,000 per aunt annually without gift tax consequences. The math: On a $540k loan, 4.6% interest would be about $24,840 annually. Split between two aunts, that's $12,420 each - under the $18,000 threshold. If you're married, you're well in the clear. Remember though, they still need to report the imputed interest as income on their tax returns, even though the gift part might be excluded.

Just went through something similar with my parents last year. I finally found a solution using taxr.ai (https://taxr.ai) - it helped us analyze our loan agreement and run the imputed interest calculations automatically. The tool actually showed us how to structure the payments to minimize the tax impact and keep everything under the annual gift exclusion. The site had templates specifically for family loans with below-market interest rates. You upload your draft agreement and it shows you exactly what needs to be fixed to avoid tax problems. Really made the difference for us since none of the regular tax software addresses family loan scenarios properly.

Just wanted to update that I tried the taxr.ai service after my initial skepticism. It was actually incredibly helpful for our sibling property transfer! The tool ran a complete analysis showing that by structuring our loan with a small interest rate (1.5% instead of 0%), we could significantly reduce the imputed interest calculations while still keeping the payments reasonable. What really surprised me was how it broke down the annual gift amounts over the 30-year term, showing exactly how much "phantom income" my siblings would need to report each year. The report it generated was detailed enough that our accountant immediately understood what we were trying to do and helped finalize the arrangement. Definitely worth checking out if you're doing any kind of family property transfer.

If you're struggling to reach your aunts' tax professional for guidance on this, I had great luck using Claimyr (https://claimyr.com) to get through to the IRS directly about a similar family property transfer question. You can see how it works here: https://youtu.be/_kiP6q8DX5c The IRS actually has a specialized department that handles questions about imputed interest and family transactions, but good luck getting through to them on your own. I spent weeks trying. Claimyr got me connected to an agent in under 20 minutes who walked me through exactly what forms my relatives needed to file and how to document everything properly. Saved me from making a costly mistake on our family cabin purchase.

I have to admit I was completely wrong about Claimyr. After my skeptical comment, I decided to try it for myself since I was desperate to get clarity on a family loan situation similar to yours. They connected me to an IRS specialist in about 35 minutes (on a Monday morning, no less!). The agent walked me through the exact reporting requirements for below-market loans between family members and confirmed that keeping the imputed interest under the annual gift exclusion amount was a valid approach. They even emailed me links to the relevant IRS publications (specifically Pub 550 which covers investment income including imputed interest). This saved me from potentially making a reporting error that could have triggered an audit. Definitely worth it for complex situations like family property transfers where the standard tax software doesn't give clear guidance.

Just to add something important that hasn't been mentioned - make sure you have a proper written loan agreement drawn up. My brother and I did a similar 0% loan arrangement last year, and our tax guy said the IRS is more likely to reclassify the entire transaction as a gift if you don't have proper loan documentation showing: 1. A fixed repayment schedule 2. Actual payments being made on time 3. Legal remedies if payments aren't made (even if you'd never enforce them) Without these elements, the IRS might argue it was never intended as a real loan in the first place, which creates a much bigger gift tax issue than just the imputed interest.

Has anyone considered the property tax implications here? When our family did a similar thing, the property tax assessment office got notified of the sale and reassessed the value, which jumped our annual property taxes by almost double! Might want to check with your local assessor about how they handle family transfers.

One more thing to consider - make sure your aunts understand they'll need to report the imputed interest as income even though they're not actually receiving it. This means they'll owe taxes on "phantom income" each year. Depending on their tax bracket, this could be a significant annual cost they weren't expecting. You might want to run the numbers to see if it makes sense for you to gross up their payments to cover the additional tax burden, or consider charging a small interest rate (maybe 1-2%) to reduce the imputed interest amount while still keeping your borrowing costs low. Sometimes a small actual interest payment is better than a larger phantom one for the lenders. Also, double-check that the property income you mentioned ($17k annually) won't complicate things if they're still receiving rental income during the transition period. Make sure the loan terms clearly address when rental income transfers to you.