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The suggestion that "you will have income tax problems" refers to the the IRS standard assumption that there is no such thing as a free lunch. It's like an interest-free loan: the IRS assumes it doesn't exist, and you would be expected to treat the market-rate interest you *didn't* pay as income. When the loan comes from a relative, that phantom interest may be considered as a gift, but that further complicates matters. Maybe the loaner would have to pay a gift tax. (my head is starting to ache...)

It looks to me like the "income tax problems" would fall to your parents, who would incur additional income equal to a market rent rate -- which you could gift back to them if it's less than $10,000 per year -- possibly then incurring a tax on the phantom income yourself. (pounding...)

My suggestion is that you and your parents see the attorney who set this up and ask him/her these questions. They may even have a pre-typed information sheet (preferably on their corporate letterhead) with the answers if it's a standard Massachusetts thing. At least then you would have some recourse (against penalties, and possibly for malpractice) if this comes back to bite you.

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