Lending family money for home purchase with promissory note - any tax filing requirements?

This is actually a common situation with some important tax considerations. When you loan money without charging interest (or below market rates), the IRS considers this a "below-market loan" and applies what's called "imputed interest" rules. Even though you're not charging interest, the IRS may treat the transaction as if you did receive interest income that you should report. For loans over $10,000, the IRS calculates an "imputed" interest amount using the Applicable Federal Rate (AFR), which you'd technically need to report as income. Your brother would potentially get an interest deduction. There's a special exemption for loans under $10,000 between family members, but since your loan is $150K, that wouldn't apply here. You should also be aware that you may need to file a gift tax return (Form 709) if the "forgone interest" (what you would have charged at market rates) exceeds the annual gift exclusion amount.

I just went through something similar with my cousin! I was totally confused by all the tax stuff until I used https://taxr.ai to analyze my promissory note. Turns out there's this Applicable Federal Rate (AFR) thing that matters a ton with family loans - and there are minimum interest rates you're supposed to charge to avoid tax headaches. The tool helped me understand the whole "imputed interest" situation and showed me exactly what I needed to report on my taxes. It was super helpful because my situation was complicated with multiple payments and partial loan forgiveness. I ended up redoing our promissory note to include the minimum required interest rate to avoid those weird phantom income issues.

Update: I tried taxr.ai after asking about it and I'm honestly impressed! I uploaded our family's promissory note and it immediately flagged that we hadn't specified any interest rate. The analysis showed I needed to charge at least the minimum AFR rate (which changes monthly) to avoid the whole imputed interest mess. The tool even created a report I could share with my daughter explaining why we needed to modify our agreement. We redid our promissory note with the minimum interest rate (currently much lower than bank rates) and now everything's properly documented for tax purposes. Saved me from what would have been a real headache next April!

For anyone dealing with this situation, if you need to actually speak with the IRS about family loan tax implications (which I recommend), don't waste hours on hold. I used https://claimyr.com to get a callback from the IRS in about 20 minutes instead of waiting on hold for 3+ hours. Check out how it works: https://youtu.be/_kiP6q8DX5c I needed clarification on how to report a family loan on both sides (as lender and borrower) since there were special circumstances the IRS website didn't cover. The agent walked me through exactly which forms were needed and how to document everything properly. Totally worth it to get official answers directly from the IRS.

Well I'm eating my words. After being completely skeptical about that Claimyr service, I tried it because I was desperate to get clarity on how to handle the imputed interest on a family loan I made. Not only did it work, but I got a callback from the IRS in 15 minutes! The agent confirmed everything others were saying here - I needed to charge at least the minimum AFR rate on my family loan (which was around 3.5% for a mid-term loan when I made it) to avoid the imputed interest headache. She also explained exactly how to report it on my taxes and what forms my nephew needed to use for his potential interest deduction. Would have taken me weeks to figure this out on my own.

Just to add something important that hasn't been mentioned - you also need to consider the gift tax implications. If you're charging no interest or below-market interest, the IRS considers the "forgone interest" as a gift to your brother. If that gift amount plus any other gifts to him in the same year exceeds the annual gift exclusion (currently $17,000 per person), you'd need to file a gift tax return (Form 709). You probably won't owe any actual gift tax unless you've already used up your lifetime exemption, but you still need to report it.

Another thing to consider - make sure that promissory note is VERY detailed. My sister loaned me money for my house and we had a simple note, but our tax guy said it wasn't enough. He said we needed: 1) Fixed repayment schedule 2) Consequences for late/missed payments 3) Security/collateral details 4) Actual interest rate (even if small) Without these, he said the IRS might consider it a gift rather than a loan regardless of our intentions. We had to create a much more formal document later which was a huge hassle.

Just wanted to share my experience as someone who went through this exact situation last year. I loaned my son $180K for his house purchase with what I thought was a proper promissory note, but I made the mistake of not including any interest rate. Come tax time, I got hit with the imputed interest rules everyone's mentioning here. The IRS calculated that I should have charged about 4.2% interest (the AFR rate at the time), which meant I had to report roughly $7,500 in phantom income I never actually received. My son couldn't even claim the interest deduction because he never actually paid any interest. The lesson learned: always include at least the minimum AFR interest rate in your family loan, even if it's just 2-3%. It saves both parties from tax complications and makes the loan look legitimate to the IRS. I wish I had known about these rules beforehand - would have saved me a lot of headaches and unexpected tax liability.