How to Lend Money to Family Members
Lending money to adult children for a house can work well if you create a written agreement, charge interest and understand the risks. Gifting is another option.
NEW YORK — Question: My son and daughter-in-law would like us to lend them money to make a down payment on a house. How do we do this, and what are the pros and cons?
Answer: If your adult child or another family member asks you to lend them money— say, to pay for a wedding, a down payment on a house or some other major expense — you may be eager to assist. And with a solid plan in place, an intrafamily loan can both provide your loved one a low-cost way to borrow money and give you the satisfaction of offering a helping hand.
But as you decide how to extend a loan, keep in mind there’s a chance you won’t get the money back— and if that happens, your relationship with the borrower may suffer. You should never lend more money than you can afford to lose.
If you decide to go ahead with a loan, putting the repayment guidelines in writing helps assure the terms are clear and may improve the chances of being repaid.
R. Philip Petrowski, a certified financial planner and senior partner at Blackhorn Partners in Middleton, Wisconsin, recommends drawing up a promissory note (a written loan-repayment agreement between a lender and borrower), ideally with the help of a family law attorney.
You may also want to get the document notarized, he says. The agreement should specify the amount of the loan, the repayment schedule and the amount of interest you’ll charge. As you determine the interest rate you’ll charge, keep IRS rules in mind. If you lend more than $10,000, you must charge an interest rate equal to or higher than the IRS applicable federal rate (AFR).
There are three AFR tiers based on the length of the loan: short-term (up to three years), midterm (three to nine years), and long-term (10 years or more). AFRs are updated monthly on the IRS website at www.irs.gov/applicable-federal-rates.
You must report the interest on your income tax return.
If the interest rate on a loan of more than $10,000 isn’t at least as high as the AFR, you may owe tax based on the difference between the AFR and the interest rate you actually charged. If the loan amount is $10,000 or less, you can set a rate (including 0%) without worrying about those tax consequences.
If your loved one defaults on the loan, the written agreement you created may protect you. If you can demonstrate that the loan is uncollectible, you may be able to claim a deduction for a non-business bad debt. The bad debt will be treated as a short-term capital loss on your tax return, says Marianela Collado, a CFP at Tobias Financial Advisors in Plantation, Florida.
To sidestep the complications that can come with offering a loan, you could make the money a gift, if you can afford it. However, if you give more than the annual gift tax exemption ($19,000 per recipient in 2025), you’re required to file a gift tax return with the IRS, and the amount will count against your lifetime estate tax exemption. If you’re married, you and your spouse can give a combined $38,000 per recipient without filing a gift tax return.
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