What are the legal issues related to intra-family sales and loans?
Well, even though a sale or a loan between family members might be desirable, it’s also going to have to be commercially reasonable in the eyes of the IRS so it will not be considered a gift. What’s commercially reasonable? Well, commercially reasonable involves the terms of the sale or the terms of the loan. It should be documented. There should be a promissory note. It may be secured by property, in which case that security should be recorded against that property. Actual payments of either interest or interest in principle must be paid by the borrower or the purchaser, to the seller or the lender, which is usually the senior generation. It’s got to be commercially reasonable if it’s going to be respected. If clients and children don’t respect the terms of that transaction, they shouldn’t expect the IRS to respect that transaction.
Note: The Tax Cut and Jobs Act of 2017 signed into law in December 2017 increased the exemption amounts mentioned in these videos. The personal estate, gift, and generation-skipping tax lifetime exemption was increased to $11.18 million per person. The annual gift tax exclusion was increased to $15,000 per donee per year.
Both amounts are indexed for inflation and may increase year over year until December 31, 2025, when the law sunsets and reverts to 2017 values.