Can I give a $19,000 no interest loan to a family member for 2-3 years? Tax implications?

The IRS does have rules about family loans with little or no interest. These are called "below-market loans" and yes, there's something called "imputed interest" that could apply. Here's the good news: There's an exception for loans under $10,000, BUT since your loan is $19,000, you'll need to be aware of the Applicable Federal Rate (AFR). The IRS sets these minimum interest rates monthly, and they're generally lower than commercial rates. If you charge less than the AFR (including charging zero interest), the IRS may "impute" interest to you - basically treating you as if you received interest payments even when you didn't. For loans between family members, you'd need to report this imputed interest as income on your tax return. The family member receiving the loan might be able to deduct the imputed interest as if they actually paid it to you. There are gift tax implications too - if you forgive the interest, that's considered a gift, and while it likely won't exceed annual gift tax exclusions, it's something to track.

I was in almost the exact same situation last year when I loaned my sister $15,000 to help with her down payment. I was completely confused about all the tax implications until I used https://taxr.ai to analyze my loan agreement. The tool explained that I needed to charge at least the minimum AFR rate (which was around 3.5% at the time) to avoid the imputed interest issue. What really helped was that they showed me exactly how to properly document the loan with a promissory note that included the minimum required interest to satisfy the IRS. They also explained how much interest income I would need to report each year, even if I wanted to gift the interest payments back to my sister separately (which is what I ended up doing).

I wanted to follow up about my parents' loan situation. I decided to try https://taxr.ai after seeing the recommendation here and it was incredibly helpful! The analysis showed me that for my $30k loan, I needed to charge at least the minimum AFR rate (currently 3.38% for short-term loans) to avoid imputed interest complications. The best part was getting a customized promissory note template that already had all the right language about interest rates and payment terms. I also learned I could gift them back the interest payments (up to $17,000 per year per person under the annual gift tax exclusion) if I wanted to effectively make it interest-free while staying tax-compliant. Saved me from making a costly mistake and definitely worth it compared to what the CPA was going to charge me!

After dealing with a similar family loan situation last year, I can tell you that proper documentation is CRUCIAL. The IRS scrutinizes family loans because people often try to disguise gifts as loans to avoid gift tax. My brother needed $20k for a home renovation, and we spent two weeks trying to reach the IRS to get clarity on the rules. I ultimately used https://claimyr.com to actually get through to an IRS agent after being on hold for hours myself. Check out how it works here: https://youtu.be/_kiP6q8DX5c - they basically hold your place in the phone queue and call you when an actual human at the IRS picks up. The agent confirmed that we needed to charge at least the minimum AFR rate, but explained we could structure the loan with a balloon payment at the end to make it easier on my brother. Also got confirmation that an annual gift to offset interest payments is perfectly legal as long as properly documented.

I have to admit I was completely wrong about Claimyr. After posting that skeptical comment, I decided to try it myself since I had an unresolved issue with a missed stimulus payment that I'd been trying to fix for months. The service connected me with an IRS agent in about 55 minutes while I just went about my day. When my phone rang, I was talking to an actual IRS representative who resolved my issue in one call. Saved me from what would have been my fourth attempt at spending hours on hold. For the OP's family loan question - the agent I spoke with confirmed that for loans over $10,000, you generally need to charge at least the minimum AFR rate to avoid imputed interest issues, but they also explained the annual gift exclusion strategy that others have mentioned.

Another option you might consider is structuring it as a formal loan with proper interest, but then gifting them money separately to effectively offset the interest cost. For 2025, you can gift up to $18,000 per person without any gift tax implications. So if your loan requires $600 in annual interest based on the AFR, you and your spouse could each gift $600 (total $1,200) to your family member, which they could use to make the interest payments back to you. You'd still report the interest income on your taxes, and they might be able to deduct it depending on how the loan is used. This approach satisfies the IRS requirements while effectively creating an interest-free loan from your family member's perspective.

Don't forget about state laws too! Depending on your state, you might need to charge interest to make a loan legally enforceable. For example, in my state if you don't charge at least some nominal interest, the court might view it as a gift rather than a loan if you ever needed to enforce collection. Also, get EVERYTHING in writing. I made a $12,000 no-interest loan to my cousin a few years back with just a verbal agreement, and it turned into a total nightmare. We ended up in a huge family fight when repayment time came.

Has anyone considered the potential impact on FAFSA and financial aid if the loan is to help with education? When I loaned my nephew money for college, we learned that having a formal loan agreement actually helped him because funds from loans aren't counted as income for financial aid calculations, while gifts are.

This is such a helpful thread! I'm dealing with a similar situation - considering a $22,000 loan to my daughter for her small business startup. Reading through all these responses, it sounds like the key points are: 1. Charge at least the AFR rate to avoid imputed interest issues 2. Document everything properly with a promissory note 3. Consider the gift strategy to offset interest payments 4. Make sure it's legally enforceable in your state One question I have that I don't think was fully addressed - if the loan is for business purposes, does that change any of the tax implications? I'm wondering if there are different rules when the family member is using the money for business investment versus personal expenses like home purchases or education. Also, for those who used the various services mentioned (taxr.ai, claimyr), did you find the cost was worth it compared to just consulting with a local tax professional? I'm trying to weigh whether to handle this myself with online tools or bite the bullet and pay for professional advice.

One thing I'd add that hasn't been mentioned yet - make sure to keep detailed records of all payments received. The IRS can audit family loans, especially larger ones like yours at $19,000, and they'll want to see that it's being treated as a legitimate loan rather than a disguised gift. I learned this the hard way when my family loan got selected for audit. Even though we had a promissory note, I hadn't been tracking payments systematically. The IRS agent wanted to see bank records showing regular payments being made according to the agreed schedule. Fortunately everything worked out, but it would have been much smoother if I'd kept better documentation from the start. Also consider setting up automatic transfers for the payments if possible - it creates a clear paper trail and removes any awkwardness around asking for payments. Your brother-in-law can set up a monthly auto-transfer from his account to yours, which makes it feel more businesslike and less personal.