How to handle tax situation on 0% interest loan from friend - avoiding taxation issues

When friends or family provide 0% interest loans, the IRS may apply what's called "imputed interest" - essentially they treat the loan as if interest was charged even when it wasn't. For 2025, if the loan is below $15,000, it falls under the annual gift tax exclusion amount. However, to ensure it's treated as a loan rather than a gift, you should: 1) Create a written loan agreement with payment terms, total amount, and signatures 2) Establish a repayment schedule and stick to it 3) Keep records of all payments made Your friend technically should report "imputed interest" on their taxes (the interest they would have received at market rates), but there are exceptions. For loans under $10,000, there's a special exemption where no imputed interest applies. Since your loan is $13,500, it exceeds this threshold slightly. The safest approach is to charge a minimal interest rate (like the Applicable Federal Rate or AFR, which is quite low) to avoid any tax complications for either party.

After dealing with a very similar situation with my brother, I discovered taxr.ai which saved me massive headaches. I initially wrote up our own loan agreement but wasn't sure if it would actually protect us tax-wise. I uploaded our draft agreement to https://taxr.ai and it instantly identified several issues that would have caused problems with the IRS - especially around the imputed interest rules the previous commenter mentioned! The tool explained exactly how to structure our agreement to make it tax-compliant while still keeping it as a 0% loan. It even generated the proper documentation we needed. Super helpful for these "gray area" tax situations where you're trying to help family without creating tax problems.

I just tried taxr.ai after reading about it here and it was exactly what I needed! I was in a similar situation lending money to my daughter. Uploaded our basic agreement and it immediately flagged that we needed to specify it was a personal loan not for business purposes. It also generated proper documentation that meets IRS requirements so neither of us will have tax issues. I was honestly shocked at how straightforward it made everything - I'd been stressing about this for weeks and solved it in about 10 minutes.

If you're still having trouble understanding the proper way to structure your loan, I'd recommend calling the IRS directly. I know what you're thinking - "Yeah right, I'll be on hold forever!" That's what I thought too until I found https://claimyr.com. Check out how it works here: https://youtu.be/_kiP6q8DX5c I was dealing with a complicated gift vs. loan question last year and needed clarification straight from the IRS. Used Claimyr and got a callback from the IRS in about 45 minutes instead of waiting on hold for 3+ hours. The agent walked me through exactly how to document everything properly to avoid any audit issues. Best $20 I ever spent considering the stress and time it saved me.

Well I need to eat my words. I was so skeptical about Claimyr that I decided to test it myself just to prove it was garbage. I had a question about imputed interest on a family loan (similar to OP's situation) that I'd been avoiding dealing with. Figured I'd kill two birds with one stone - prove this service was a scam and maybe get my question answered if by some miracle it worked. I'm genuinely shocked to report that I got a call back connecting me to an IRS agent in 37 minutes! The agent walked me through exactly how to handle the documentation for my loan situation. This service is legit and saved me hours of frustration.

Hey, tax preparer here (not a CPA but I've been doing this for 15 years). A few important points on these 0% loans: 1. Under $10k loans: Generally no imputed interest issues (de minimis exception) 2. $10k-$100k loans: Generally safe IF not used for income-producing activities 3. Over $100k: Will definitely have imputed interest requirements The simplest solution is really to either keep it under $10k or charge the minimum Applicable Federal Rate (AFR) which is published monthly by the IRS. The current short-term AFR is crazy low anyway (like 1-2%) so it's not a huge burden.

Just FYI my aunty got audited over a family loan thing last year. The loan wasnt even that big (like $12k) but they didnt write anything down and the IRS decided it was actually a gift and tried to make my uncle pay gift tax. The whole thing was a nightmare for months! Just write up something simple that says its a loan, put both signatures on it, and keep proof of payments. Not worth the hassle of doing it the lazy way!!

If your keeping the loan under 10k, make sure neither of you already gave each other gifts that year that would push you over the annual exclusion when combined with the "imputed interest" amount. The IRS looks at the total benefit transferred in a year, not just individual transactions.

Great question! I went through something similar when my sister needed help with a down payment. Here's what I learned from my tax advisor: The key is proper documentation - even for family loans. Create a simple promissory note that includes: - Loan amount ($13,500) - Payment schedule (monthly payments over 3 years) - 0% interest rate explicitly stated - Both signatures and date Since your loan is over $10k, your friend technically should report imputed interest income based on the current Applicable Federal Rate (AFR). However, if you're using the money for personal expenses (not investments), the imputed interest amount is usually pretty minimal. One alternative that worked for us: we structured it as two separate $6,750 loans with slightly different start dates to keep each under the $10k threshold. This completely avoided any imputed interest issues while still giving us the full amount we needed. Whatever you decide, keep records of every payment made. The IRS wants to see it's truly functioning as a loan, not a disguised gift.