How does a mother loan 100k to their daughter without penalties

My mom wants to loan me 100k to buy a townhouse. This is not a down payment it is the full purchase price. I intend to pay her back once my current house sells partially via lump sum then on a monthly payment plan. I have gainfully employed and can afford to pay her back this is not a gift. I don’t want her to incur any extra taxes. How do I go about this.

Asked on September 3, 2017 under Real Estate Law, Arizona


SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 3 years ago | Contributor

There are no taxes on making or receiving repayment of a bona fide loan--you would pay taxes on any interest income you receive, as you would on *any* income you get, but not on the principal of the loan--so long as it is a bona fide or genuine loan. You and your mother need to have a formal written loan agreement and promissory note (with or without giving her a mortgage, or security interest, in the property itself--i.e., if you default, could she foreclose?) which sets out all the terms of the loan, including the repayment schedule, and which charges you interest, even if only a very modest rate (e.g. more or less equal to inflation). If you have a formal loan agreement; if she is making at least some interest on it (important because interest-free loans may be seen as gifts, since you are getting a considerable benefit from them you can't get from private lenders); and most importantly, you honor the loan (make the repayments on schedule), it will be a loan, not a gift, and will be have no tax effect on her but for her owing the appropriate amount of tax on the small amount of interest she makes.
I would recommend giving her a security interest--making this a full private mortgage. The reason is, if anything else causes there to be a lien against your home (e.g. you have a car accident and are sued for more than your insurance), your mother, by having a first priority lien, will be protected--she'll have to be repaid before other creditors.
Speak to a real estate attorney about drawing up the loan paperwork and good luck with your new purchase.

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