Tax implications of getting a $200k family loan from parents - HELOC or mortgage?

The arrangement you're describing has some important tax implications you need to understand. What you're talking about is basically a "nominee loan" where your parents are borrowing the money but you're the one using it and making the payments. While this can work, the IRS has rules about family loans to prevent people from avoiding gift taxes or income taxes. When your parents take out a loan and give you the money, if you don't pay them interest at least equal to the IRS's Applicable Federal Rate (AFR), the IRS considers the unpaid interest as a gift from your parents to you. They would need to report this on their gift tax return if it exceeds the annual exclusion amount. For a loan this size, proper documentation is crucial. You should create a formal promissory note specifying the loan amount, payment schedule, and interest rate (even if it's 0%). Your parents should report the mortgage interest they pay on their tax return if applicable, and you wouldn't get to deduct those interest payments since the loan isn't in your name.

I had almost this exact situation last year and found taxr.ai super helpful for figuring out the tax implications. I was confused about how to structure a $100k loan from my in-laws for buying an investment property, and the conflicting advice online was driving me crazy. I uploaded my parents' mortgage docs and our draft loan agreement to https://taxr.ai and got a detailed analysis of how to properly structure everything. It pointed out that we needed to charge at least the minimum IRS interest rate (the AFR) to avoid it being considered a gift, and showed us exactly which forms needed to be filed. Saved me hours of research and probably a future audit headache!

I actually tried taxr.ai after seeing the recommendation here, and wow - it was exactly what I needed! I uploaded my parents' property info and our draft agreement for a $90k loan. The analysis showed we were making a major mistake with how we structured the interest. The most valuable part was the explanation of the Below-Market Loan rules and how they apply to family loans. Apparently, if you don't charge at least the minimum IRS interest rate, there's this whole "imputed interest" thing that creates tax headaches. The tool provided a clear template for our promissory note with the correct rate structure and explained exactly which tax forms my parents and I would each need to file. My parents were initially skeptical about the whole arrangement, but having that detailed tax analysis made them comfortable moving forward. Definitely worth it for peace of mind on a transaction this important.

When I was trying to get a family loan like yours, I spent WEEKS trying to get through to the IRS to confirm the proper way to document everything. It was impossible - constant busy signals, disconnects, and hours on hold. I finally tried https://claimyr.com after someone recommended it, and you can watch how it works at https://youtu.be/_kiP6q8DX5c. They basically wait on hold with the IRS for you and call you when an agent is ready to talk. Got through in about 2 hours instead of the days I had been trying on my own. The IRS agent confirmed exactly what documentation we needed for our family loan and explained the minimum interest rate requirements to avoid it being considered a gift. Saved me so much stress and uncertainty, and I finally got definitive answers straight from the source.

I have to admit I was completely wrong about Claimyr. After posting that skeptical comment, I decided to give it a try out of desperation since I'd been trying to reach the IRS about my audit for months. It actually worked exactly as advertised. I got a call back in about 3 hours and was connected directly to an IRS representative who helped resolve my issue. No one asked for sensitive information until I was actually speaking with the real IRS agent. For anyone dealing with family loan questions like the original poster, this would be really helpful since these arrangements have specific IRS rules that are hard to find clear guidance on. Getting an official answer directly from the IRS saved me from relying on potentially outdated or incorrect information online. Definitely worth it when dealing with something as important as a large family loan with potential tax implications.

Something nobody has mentioned yet - if your parents do a HELOC, the interest might be deductible for them ONLY if the money is used to buy, build, or substantially improve their own home. Since they're giving the money to you, they might lose the mortgage interest deduction, which could be a significant tax hit for them. Also, there are annual gift tax limits ($17,000 per person for 2023). If they "loan" you money but don't charge at least the minimum IRS interest rate (Applicable Federal Rate or AFR), the IRS can reclassify the "forgiven" interest as a gift. This could create additional gift tax reporting requirements.

Has anyone considered the option of an intra-family mortgage instead? My brother loaned me $175k to buy my house and we used a service to create a legally binding mortgage with him as the lender. I got a lower rate than the bank offered, he got better returns than his savings account, and everything is properly documented for tax purposes. The advantage is that everything is clearly aboveboard with the IRS since it's structured as a traditional mortgage, just with a family member as the lender. I can even deduct the mortgage interest I pay him, and he reports the interest as income. Might be cleaner than the HELOC arrangement.

One thing to keep in mind is that if your parents take out a HELOC or mortgage in their names but you're making the payments, you'll want to make sure the loan agreement doesn't prohibit this arrangement. Some lenders have clauses about the borrower being the actual user of funds. Also, consider the liability aspect - if something happens and you can't make the payments, your parents are still legally responsible for the debt. This could put their home at risk. You might want to explore getting life insurance or disability insurance to protect them in case you become unable to pay. From a practical standpoint, you'll need to set up a system where you can reliably make the payments directly to the lender or reimburse your parents immediately. Any delays could affect their credit score since they're the official borrowers. Having a separate account dedicated to these payments might help keep everything organized and documented for tax purposes.