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Mentor
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There are no tax experts here it seems. You will not be taxed. 1. A gift is not taxable. 2. Arguably over the 17k annual exclusion for gifts, the transferor is supposed to file a gift tax return but the gift is not taxable unless over some millions of dollars threshold. 3. The annual exclusion is per person so each of your parents could transfer 17k each, and if you have spouse, exclusion is up to 68k. 4. To be treated as a loan, IRS would need to recharacterize “gift” as loan and then impute interest to parents — this is hard to do considering there really is no obligation to repay and it’s family, not commercial so more likely to be gift. The real problem is that underwriters will ask questions about where money came from and your parents might need to supply a gift letter to close loan. A real estate specialist can correct me, but my loan guy said gifts are only allowed for primary residence, not rentals.
Fair enough, didn't know that point on the underwriter. Seems like OP wants a interest free loan. When it came to the underwriter I thought having the loan following APR would negate that.
It wouldn’t be a gift, as anything above the gift amount permitted by the IRS would be taxable. You should be sure to pay interest so it’s defensible to IRS that it’s a loan. Then, worst case scenario is that the interest would be taxable. That’s peanuts in taxes.
The IRS gift limit is $17K in 2023. So paying taxes on interest income is certainly preferable to paying taxes on amount above $17K.
I should mention it's 17,000 per parent, so your parents combined could give you 34 as a gift. And if you have a partner, they can give $17,000 to your partner too. So we're talking 68,000 between two parents and two recipients.
Subject Expert
The confusion here is that you are using “gift” to mean loan. The problem is that you are committing loan fraud if you claim this as a gift because it’s not a gift. If you claim this as a gift, you (and probably your parents) will have to sign disclosures that this is a gift and does not need to be paid back (which would be a lie which makes it loan fraud). From an IRS perspective there’s no issue because this isn’t a gift, it’s a loan.
Mentor
You wouldn’t owe taxes; nor would your parents until they gift upwards of $12million to you. So much wrong information in this thread. I practice tax law fwiw.
Why would they be taxed on it? They aren't getting money. They are giving it.
You might be taxed, but probably not. Firstly, it's a loan. Make sure you document it. You don't get taxed on loans.
Secondly, there are provisions for exempting gifts from taxes. It depends on several factors. They fall under a similar category as inheritance. Check with a pro at filling time.
Subject Expert
Gift taxes (while they don’t apply in this situation) are paid and reported by the person giving the gift not getting the gift.
I did something similar with my parents (they gave me short-term loan). Pretty sure my dad never declared the interest as income.
So it could be considered a gift if they fill out out the form for gift tax when they file their taxes. They will not be taxed, the 2023 limit is 17k, I believe they can gift up to 2-3 years worth in one year and you would still not be taxed so you could get 34k in one year. But when filling out the form it needs to be specified that it’s multiple years and then they cannot gift you anymore until that time is up. If it’s over the gift limit the tax burden falls on the recipient. But this is all IF you and your family fill out the form. That is primarily the only way the IRS will know about it. Not giving you advice on what to do.
If you have two parents, each can give you $17k per year with no tax liability, bringing the total to $34k.
Ideally you would have started this at the end of last year, so you could have received one gift payment for 2022, and another for 2023 to bring your total to $40,000.
Like another mentioned, have them gift you the maximum, then give you a loan for the remaining amount and be sure to create documentation to show you are paying interest on it.
Edit Attorney 1 is correct - 17k per person per recipient, so you should be good!
How does someone “gift” a “loan”? 🤔
Should also add there are preferred rates for loans between family members to avoid situations like this. Just google "interest rates for loans family" should be the first thing that pops up. These rates are always going to be lower.