What is a Gift Loan?

A gift loan is provided by an individual to a friend or family member in need of immediate financing. Often, the borrower cannot qualify for the financing on their own. The gift loan fills a gap where no other lender would extend financing, but it does come with several legal repercussions.

Tax Treatment

Any gift loan between $10,000 and $100,000 needs to be reported for tax purposes. The lender may be assessed taxes as part of the "gift tax" law if they do not charge interest. Even if interest is charged, if the amount of interest is below national averages, the difference between the two interest rates may be assessed against the lender's gift tax annually.

Legal Treatment

You will need a written and formal agreement in order to make the loan terms enforceable. Create a written agreement for the financing between both parties prior to exchanging any funds. You may work with a lawyer to establish a legal contract, but it is not necessary. The most important thing is simply having a written document containing information on the amount owed, the payment plan, the interest rate and terms to exit the contract in the future.