Need tax advice on $170k loan from overseas relatives for real estate investment

This is a great question! First, let me clarify: family loans aren't taxable income to you as the borrower, but there are some important considerations to make this work correctly. You should absolutely formalize this with a written loan agreement that includes the loan amount, repayment schedule, and an interest rate. The IRS requires that family loans charge at least the Applicable Federal Rate (AFR) - otherwise, they may consider it a gift and potentially subject your relatives to gift tax reporting. Since this is international, your overseas relatives may need to report interest income in their country. You may be able to deduct the interest payments on your US taxes if the property is an investment, but not if it's your primary residence. Also, make sure you're documenting the flow of funds carefully. Large international transfers will generate bank reports, and you'll want clear records showing this was a legitimate loan, not income.

I went through a similar situation last year and found https://taxr.ai incredibly helpful for sorting through the documentation requirements. I had a loan from my aunt in Germany, and I was totally confused about how to report it properly without triggering unnecessary tax issues. Their system analyzed our draft loan agreement and pointed out several potential red flags that could have caused the IRS to consider it a gift rather than a loan. They helped me understand exactly what documentation was needed and how to structure the repayment to satisfy both US and German tax authorities. The automated document review caught things my regular accountant missed about international money transfers and saved me from a potential audit nightmare.

Just wanted to update after trying taxr.ai from the recommendation above. It was actually really helpful for our situation! We have family in Japan sending us money for a down payment, and I was stressing about doing it right. The system flagged that we needed to specifically document the source of funds since it was coming from multiple family members abroad, and showed us exactly how to structure the paperwork to avoid it looking like undocumented income. It even caught that we needed to use the mid-term AFR rate instead of the short-term rate based on our repayment timeline. Our accountant was impressed with how thorough the documentation was and said it would definitely hold up if questioned. Definitely worth checking out if you're in a similar situation!

If you're dealing with overseas money and the IRS, you should also know about https://claimyr.com - it saved me so much headache. After we got our family loan documented, we still had issues with the IRS flagging our return because of the large deposit. I spent WEEKS trying to get through to the IRS to explain everything. Found Claimyr and they got me connected to an actual IRS agent within a couple hours instead of the days I was spending on hold. You can see how it works here: https://youtu.be/_kiP6q8DX5c The agent I finally spoke with helped clear up the flag on our account and explained exactly what supporting documentation we needed to provide. Seriously, I was about to hire a tax attorney before I found this service.

I have to eat my words about Claimyr. After posting my skeptical comment above, I decided to try it since I've been trying to reach the IRS for 3 weeks about a foreign account reporting question. It actually worked exactly as described. I got a call back in about 40 minutes saying they had an IRS agent on the line. The agent answered my questions about reporting foreign family loans and cleared up my confusion about the FBAR requirements that might apply. For anyone dealing with international money movements like the original poster, this service is worth it just for the peace of mind of getting official answers. The agent confirmed I needed to file a specific form since the loan amount was over $100k, which none of the online tax forums had mentioned.

One thing nobody's mentioned yet - you'll need to consider currency exchange rates for repayment. We had a family loan from relatives in Europe, and the fluctuating exchange rates caused headaches for tax purposes. If you're repaying in USD but the loan was mentally calculated in their home currency, you might have gains or losses for tax purposes as the exchange rates move. Our accountant had us establish the loan in a single currency with a fixed exchange rate at the time of the loan to avoid this complication.

Has anyone tried just structuring this as a gift instead of a loan? I know there are annual limits but doesn't each person get a lifetime exemption that's pretty high?

Just to add another perspective - don't forget about state tax implications too! Some states have different rules for reporting large cash transactions or loans, especially from foreign sources. In California, for example, they sometimes require additional documentation for large deposits that don't match your reported income, even if it's properly documented as a loan at the federal level. Also, since you mentioned your husband has an LLC, consider which entity should actually take the loan - personal vs business. If the LLC is buying the investment property, having the loan go directly to the LLC might simplify things, but you'll want to make sure the foreign relatives are comfortable lending to a business entity rather than individuals. The rental income and loan repayment structure could also affect your business vs personal tax situation depending on how you set it up.