Loaning family member with lien on the house

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My sister has lent me 40K with and put lien on my house. Now, I am returning her money to her in full. How should we both report this money in our taxes. I think I don't need to report it as a income as a lien was put on my house. But if I return her the money in full how can she avoid paying tax on it? Also, what paperwork do I need to remove lien? 

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mahra said:   But if I return her the money in full how can she avoid paying tax on it ?Just hand it to her.

mahra said:   My sister has lent me 40K with and put lien on my house. Now, I am returning her money to her in full. How should we both report this money in our taxes. I think I don't need to report it as a income as a lien was put on my house. But if I return her the money in full how can she avoid paying tax on it? Also, what paperwork do I need to remove lien? 
  
Just a thought .. I'm assuming she gave you $40K and you want to file something.  And now you're returning the money and she needs to file something.  

I know if you give it as gift ...you file an IRS form (forgot what the actual form is), and that'll be fine.  Basically your sister receives the money tax free & wont have to file anything.  The reason you need to file it - there is a life time maximum of tax free gift (limit is pretty high, so no issue).

So my thought is -  she files it as $40K gift to you.  And perhaps you "gift" $40K to her husband and file it as such.      


 

It was a loan to you so she put a lien. You pay it back and she should remove the lien just in the same way she put it. Did a lawyer put the lien for her?

No tax reporting if there was no interest charged

needdealsnow said:   It was a loan to you so she put a lien. You pay it back and she should remove the lien just in the same way she put it. Did a lawyer put the lien for her?

No tax reporting if there was no interest charged


Can someone smarter than I comment on this?

Doesn't the irs say that family loans have to charge interest at their minimun published rate? Even if she doesn't truely charge interest, she has to claim it on her taxes, with the unpaid amount considered a gift to the borrower?

wilesmt said:   
needdealsnow said:   It was a loan to you so she put a lien. You pay it back and she should remove the lien just in the same way she put it. Did a lawyer put the lien for her?

No tax reporting if there was no interest charged


Can someone smarter than I comment on this?

Doesn't the irs say that family loans have to charge interest at their minimun published rate? Even if she doesn't truely charge interest, she has to claim it on her taxes, with the unpaid amount considered a gift to the borrower?

You are correct. A few years ago I loaned a family member 60k. Both of our accountants said I would have to show interest received for tax purposes.  I charged 3% instead of it being interest free, problem solved.

wilesmt said:   
needdealsnow said:   It was a loan to you so she put a lien. You pay it back and she should remove the lien just in the same way she put it. Did a lawyer put the lien for her?

No tax reporting if there was no interest charged


Can someone smarter than I comment on this?

Doesn't the irs say that family loans have to charge interest at their minimun published rate? Even if she doesn't truely charge interest, she has to claim it on her taxes, with the unpaid amount considered a gift to the borrower?

  
yes, seems fairly complicated stuff if you charge no interest.  To simply matter people suggest charging market rate interests.

It is a small amount (relatively speaking) .. so i was thinking .. to keep things simple   Party A gives a gift to Party B (simple IRS form for Party A - no tax involved);   and Party B .. ideally his/her wife or son or whoever .. makes a separate gift back to Party A (and files a tax form, again no taxes involved).

prozario said:   
wilesmt said:   
needdealsnow said:   It was a loan to you so she put a lien. You pay it back and she should remove the lien just in the same way she put it. Did a lawyer put the lien for her?

No tax reporting if there was no interest charged


Can someone smarter than I comment on this?

Doesn't the irs say that family loans have to charge interest at their minimun published rate? Even if she doesn't truely charge interest, she has to claim it on her taxes, with the unpaid amount considered a gift to the borrower?

  
yes, seems fairly complicated stuff if you charge no interest.  To simply matter people suggest charging market rate interests.

It is a small amount (relatively speaking) .. so i was thinking .. to keep things simple   Party A gives a gift to Party B (simple IRS form for Party A - no tax involved);   and Party B .. ideally his/her wife or son or whoever .. makes a separate gift back to Party A (and files a tax form, again no taxes involved).

  Except for the possibility of owing taxes at time of death, either state or federal

There is no tax consequence for the 40k amount itself (for you when borrowed and for her when returned). Loan is not income.
If you were charged interest, that becomes income to sister when you pay it. She needs to show the interest as income on her taxes.

Since the loan was secured by your house, you maybe able to deduct that (interest payment) on your taxes.

If no interest was charged, as wilesmt stated, sister may need to recognize some income based on minimum published rate (there s a technical term for that). If it was a relatively short period of time (and since the loan amount was only 40k), the interest amounts involved will be quite small that I wouldnt bother much.

It is called Imputed interest. We are so spoiled by 0% CC Balance transfers that we forget IRS has to wet its beak in loans between family

https://turbotax.intuit.com/tax-tools/tax-tips/General-Tax-Tips/...

Wonder what is reasonable interest.. if I was earning 0.01 % interest in the checking account, can I charge the same to someone else?

The reason for imputed interest rules is so that rich people don't "loan" their family their estates at 0% interest to avoid estate taxes.

Loans have interest so for it to be a valid loan you have to be charging a realistic interest rate.

The rates are documented at the IRS:
https://apps.irs.gov/app/picklist/list/federalRates.html

https://turbotax.intuit.com/tax-tools/tax-tips/General-Tax-Tips/...

All that IRS income tax has been well covered by the FWFs. The five alarm fire alarms for me are making sure the lien release is properly done once the loan has been satisfied. IF done incorrectly, that can have long term issues when OP goes for a traditional loan or to sell the house.

Yep. I'd have the lien release drawn up and ready to execute and record when you pay. 



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