Keeping It in the Family: Intrafamily Loans

Key Takeaways

An intrafamily loan becomes a loan, not a gift, in the eyes of the IRS when three things are in place: a written agreement, a fixed repayment schedule, and interest charged at or above the Applicable Federal Rate (AFR). 

• The IRS publishes AFRs every month, and they typically run well below what a bank would charge. That gap can be a big reason many families choose this route. 

• Loans of $10,000 or less between individuals are usually exempt from these interest rules, as long as the money isn’t going toward income-producing investments.¹ 

For 2026, the annual gift tax exclusion is $19,000 per recipient, or $38,000 for a married couple splitting gifts.³ 

An intrafamily loan works like any other loan, just between people who already trust each other. Put the terms in writing, set a fixed repayment schedule, and charge interest at or above the IRS’s Applicable Federal Rate, and the IRS treats it as a loan. Skip any of those pieces, and it can be reclassified as a gift, with different tax consequences for both sides. 

That was the shape of the decision facing a couple I worked with recently. Their adult son had saved enough for a down payment on his first home, but they wanted to help him keep his monthly payment manageable without simply handing over cash. We talked through the full range of options — a one-time gift, a larger gift, ongoing monthly support, joint ownership of the home, and an intrafamily loan — before landing on a loan as the best fit. That process taught them something worth knowing before having this conversation with your own family. The choice isn’t about which option is more generous. It’s about which structure fits what everyone actually needs. 

Should You Lend Money to Family, or Just Give It? 

Think of these options less as a menu and more as a spectrum. At one end you trade away the most upside for the most simplicity. At the other, you take on more complexity in exchange for more flexibility and control. A gift is the easiest to administer, but it’s final. There’s no repayment, no interest income, and it counts against your gift tax limits. Ongoing support and joint ownership solve specific problems but bring their own complications, like an open-ended cash commitment or shared decisions on a property. A loan sits at the other end: more paperwork upfront, but your child builds a track record with a real obligation, and the wealth transfer happens at a pace you control. 

For the couple in this story, a loan let them support their son without absorbing the full cost and gave the arrangement a structure both sides could point back to. If you’re weighing this decision yourself, a wealth advisor can model how each option affects your broader financial and estate plan — our Wealth Management team specializes in this kind of planning. 

What Makes an Intrafamily Loan Different from a Bank Loan? 

A bank has to treat every borrower consistently and defend its underwriting to regulators. A family doesn’t carry that constraint, which is exactly what makes an intrafamily loan flexible in ways a bank loan can’t be. 

In this family’s case, the son was an early-career musician, and his parents worried he’d face underwriting challenges. An inconsistent income history is one of the first things a bank flags, even when it doesn’t reflect someone’s actual stability. An intrafamily loan sidestepped that problem. It also let the family tailor the repayment schedule, close faster than full underwriting would allow, and structure something like an interest-only period followed by a balloon payment, which can work well for a loan used to start a business. 

That flexibility helps any borrower who doesn’t fit neatly into a bank’s underwriting box. This could be a recent graduate, someone early in a variable-income career, or anyone still building a credit history.  

What Interest Rate Does the IRS Require You to Charge? 

Every month, the IRS publishes a set of minimum interest rates called the Applicable Federal Rate, or AFR. Think of it as the floor: charge at least the AFR that applies to your loan, and the IRS treats it as a loan, just like you intended. Charge less, and the gap between what you charged and what the AFR required can be treated as a gift instead, with imputed interest added back for tax purposes on both sides. The table below lays out the tiers and thresholds that govern this. 

One detail is worth remembering. You use the AFR in effect the month you make the loan, and that rate holds for the life of the loan. A family loan behaves a lot like a fixed-rate mortgage that way — locked in at origination, unmoved even if published AFRs climb or fall afterward. Because these rates can change monthly, check the IRS’s current AFR tables when you set terms. 

Rule	Tax Implication
Loans of $10,000 or less (aggregate outstanding)	Generally exempt from AFR and imputed interest rules, unless used to purchase income-producing assets
Loans with an aggregate outstanding balance of $100,000 or less	Imputed interest is capped at the borrower’s net investment income for the year — which can mean none at all
Short-term AFR (3 years or less)	Minimum rate for the shortest loans; published monthly
Mid-term AFR (3–9 years)	Minimum rate for mid-length loans; published monthly
Long-term AFR (beyond 9 years)	Minimum rate for the longest loans; published monthly

Thresholds and tiers per IRC §7872 and current IRS guidance, 2026.¹ 

What Are the Tax Consequences for the Lender and the Borrower? 

Once the loan is properly structured, the tax treatment is simple on the lender’s side: interest received is taxable income, reported like interest from any other source. If your child used the proceeds for a business, they can typically deduct it, the same as with a bank loan. 

The $100,000 threshold matters too, and it’s easy to miss. For gift loans of $100,000 or less, imputed interest is capped at the borrower’s net investment income for the year.¹ If your child has little or no investment income, that cap can mean no imputed interest at all, even on a loan priced below the AFR. 

If a loan is under-charged beyond what these thresholds excuse, or if you forgive part of it, the shortfall is treated as a gift. Gifts above the annual exclusion require the lender to file a gift tax return, but that’s less alarming than it sounds: with the federal lifetime exemption at $15,000,000 per individual as of 2026 ($30,000,000 per married couple using portability)³, filing a return is, for most families, a paperwork step against that lifetime total rather than a bill that comes due. These figures shift with legislation and inflation adjustments, so treat them as a starting point for a conversation with your tax professional, not a substitute for one. 

How Do You Keep It Fair Among Siblings? 

Lending to one child and not another can create real friction, even when everyone understands the reasoning. An intrafamily loan can be a meaningful financial benefit to the person receiving it, thanks to below-market convenience, flexible terms, and a lender who wants them to succeed. Other siblings tend to notice, even if no one says so out loud. 

Being transparent early, rather than after the fact, goes a long way toward heading off resentment. Some families explore a “true-up”: making a similar loan, gift, or other support available to siblings outside the original arrangement, even if the amount or structure looks different. There’s no single right answer here. What matters is having the conversation and thinking about it alongside the rest of your estate and gifting plan. Our Legacy Planning piece walks through that broader picture. 

What to Settle Before Making the Loan 

Work through each of the following before you finalize anything: 

• Whether you can afford it. Assess your own finances honestly, and think through, in advance, how you’d handle the relationship if the borrower is ever unable to repay. It’s easier to plan calmly for that now than to navigate it later. 

• Clear communication of the terms. Spell out the amount, the interest rate, and the repayment schedule so both sides understand the expectations and what happens if the terms aren’t met. 

• A realistic repayment plan. Talk through the borrower’s financial situation, job stability, and any challenges they might face, and build the repayment plan together so it reflects their actual circumstances. 

• A written agreement. Document the loan in writing, ideally with an attorney’s help. A written agreement is what prevents a misunderstanding from becoming a dispute, and it’s one of the three elements the IRS looks for. 

• The tax implications. Confirm with a tax or legal professional how your specific rate, loan size, and repayment structure will be treated — the rules above are a starting point, not a substitute for advice. 

• Whether an alternative makes more sense. If lending directly doesn’t feel right, consider co-signing a loan, making a one-time gift, or other forms of support. None is a lesser choice, just a different tool for a different situation. 

Every family works through this differently. Talk it through with your financial and legal advisors before finalizing anything — the rules matter, but so does making sure everyone understands what they’re agreeing to. Done well, an intra-family loan can be a genuine win for everyone involved.