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my dad passed away about a year ago...i bought the house from the estate at appraised value...i immediately sold the house to my son for the exact same price i bought it from the estate...i am the banker and he has a 30 year mortgage on it payable to me on monthly installments...the interest rate was the prevailing rate for our local banks...
i am going to have interest income to pay taxes on...can i avoid the taxes on the interest by gifting him the interest money on a yearly basis...it will be well below the $14,000.00 limit on gifting?

thanks in advance
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I'm not a tax expert, so I'll be curious to see whether my gut reaction of "No, not if you actually charged interest, and he actually paid it and plans to deduct it" is correct. I would think that there would be a mechanism to deal with the current year -- i.e. you could refund what you had charged him so that by the end of the year the interest charged for 2016 would be zero.

But anticipating others' questions, I'm curious about why you charge interest at all if you plan to gift it back? Is it purely so that your son can take the deduction? I suspect that this falls into having your cake and eating it too -- he can't take the deduction if you're not claiming the income.

Curious to see what others say, but a bit of elaboration on that might complete the picture.
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I'm no tax authority, but I would say that your "gift" would be just that, a separate transaction, meaning...

a. your son can deduct the loan interest paid to you.
b. the interest paid to you is interest income, reportable and taxable
c. your gift to your son is a separate transaction, and as it is within the gifting limits, it has no tax consequence. However does not relieve you of the tax due on the interest you received.

Gifting your son has no impact on the tax you owe, or that he might deduct.

If you want to help your son out while coming out even, you could gift him an amount equal to the interest you received, less the tax you paid. For example, you paid $100 on the $1000 of interest received, you would then gift your son $900. That gift would not affect his ability to deduct his loan interest.

Hope that helps.
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If you want to help your son out while coming out even, you could gift him an amount equal to the interest you received, less the tax you paid. For example, you paid $100 on the $1000 of interest received, you would then gift your son $900. That gift would not affect his ability to deduct his loan interest.

That wouldn't work the way you think. Son would still have to come up with $100 to complete the interest payments for the year.

Ira
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can i avoid the taxes on the interest by gifting him the interest money on a yearly basis

No.

Even if he made no payments at all, you'd still have to deal with imputed interest on the loan at a prescribed interest rate similar to the rate stated in your mortgage.

The only way to eliminate interest income on your return would be to eliminate the loan itself - to make a gift of the entire mortgage.

--Peter
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Son would still have to come up with $100 to complete the interest payments for the year.

Of course. After receiving a $900 gift, $100 would be too much out of pocket expense?
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The only way to eliminate interest income on your return would be to eliminate the loan itself

Even though it wouldn't be eliminated, it may be possible to reduce the interest by redoing the loan at the current AFR.
I *think* that todays long term AFR is 2.16% - so if the current loan is 3.5%, could reduce the interest quite a bit.

https://www.irs.gov/pub/irs-drop/rr-16-17.pdf


I don't know AFR law - so I may be incorrect about whether 2.16% would be the minimum for a long term loan started today.
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Of course. After receiving a $900 gift, $100 would be too much out of pocket expense?

Of course not, but your post, as written, implied that there would be no effect on anyone.

Ira
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the reason it was done this way was so i didn't get stuck paying gift tax on the entire price of the house...i had to buy the house out of the estate to pay off my siblings
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Did you consider your Lifetime Donor Exemption (item 6 in list)?

https://www.irs.com/articles/7-things-you-should-know-about-...

-pfk
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