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When one family member lends another money (in excess of annual gift limits) and annual gifts of $10,000 (by the lender to the borrower) are used to pay down the principal, can the interest owed each year be rolled into the back end of the loan so that principal and interest will eventually be paid down through the gifts?
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There is no more back ended interest deductions. IRS closed that loophole years ago.

If you owe the donor $100,000, for example, and you receive a gift of $10,000 to reduce the principal, there is no gift tax, But there is interest. If the rate is not stated in the loan document, the interest will be imputed as if there had been a rate stated. Interest tables are published by IRS. This would be the long term rate probably (there are three). I don't know when the loan was established, but IRS rates of recent times have been low - below 5%.

The interest would be income to the donor, and if the mortgage loan was recorded (it must be to be deductible), you may deduct the interest as mortgage interest.

Best wishes

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Loan was set up with one annual payment of principal and interest (based on Fed tax tables)until the loan is paid off. Was not necessarily looking at back end interest deductions. Rather if the gift of $10,000 is applied to the principal, can the interest that is owed for the same year be rolled into the loan balance and paid off in the future through additional $10,000 gifts?

If so, would the lender have to report the interest income and/or would the borrower have an investment interest deduction in the current year?
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Loan was set up with one annual payment of principal and interest (based on Fed tax tables)until the loan is paid off. Was not necessarily looking at back end interest deductions. Rather if the gift of $10,000 is applied to the principal, can the interest that is owed for the same year be rolled into the loan balance and paid off in the future through additional $10,000 gifts?

If so, would the lender have to report the interest income and/or would the borrower have an investment interest deduction in the current year?


Correct, correct, and to the extent the borrower has investment income.
Assuming the loan was used for investment purposes.
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