The “Family Bank”: Utilizing intra-family loans for loved ones


  • You may be able to utilize intra-family loans to help loved ones buy real estate, invest in a business, or pay down high-interest debt.
  • Intra-family loans are one of many strategies to help families transfer the growth of their wealth without making outright gifts.
  • Structure and process is key to ensure the loan maintains standing as a loan in the eyes of the Internal Revenue Service. Clients may create an unintended gift with estate planning implications.

Always consult with your legal and tax advisors to determine if the intra-family loan is an appropriate tool for your circumstances.

Helping a family member start the next Amazon or purchase a starter home

While there are many ways to provide for your children, we often come across parents who prefer loans rather than outright gifts. Many like to encourage hard work and sacrifice, while providing access to capital untethered from some of the more negative baggage from commercial loans.

Famously, Jeff Bezos received a nearly $250,000 investment from his parents, Jackie and Mike, to start Though many of our relatives won’t become the next E-Commerce billionaire, they can still take advantage of intra-family loan strategies to provide for their future.

If you are looking for ways to help family members secure financing, it may be advantageous to consider an intra-family loan. These private loans can offer several advantages over traditional commercial loans, including flexibility at cost-effective interest rates. As you weigh the options, here are some important things to consider when pursuing this strategy.

Structure is key

It’s important to structure the loan so that it isn’t considered a gift by the IRS. As with many government rules and regulations, there are certain elements of the loan that the government will consider if it comes under an audit. The IRS will consider factors such as:

  • A signed promissory note
  • There is an interest rate charged
  • The lender has collateral/security
  • There are records of the transaction (and noted as a loan) maintained by the lender and borrower  
  • The maturity date is fixed
  • Keeping track of repayment / a demand for repayment
  • The borrower is likely to repay

Lenders should work to document and stay within required rules to stay as a loan in the eyes of the IRS.

How much interest should I charge?

Since the 1980, interest-free and ‘below-market’ loans to family members are now viewed as a taxable gift by the IRS. The interest rates lenders may charge to family members must be no lower than the “applicable federal rate” (AFR) when the loan is issued. These rates are updated monthly and can be found through this link: HERE.

Is income tax a factor?

Lending to family members may create income tax issues for both borrower and lender. Interest income received by the lender is considered ordinary income while the borrower may be a deductible interest expense depending on the use of the funds. For example, properly structured loans to start a business or buy a home may be treated differently than to pay off a personal debt.

Forgiving the loan

One important feature of a family vs. commercial loan is the flexibility regarding loan forgiveness. While it will likely cause a tax event, this may be preferable than the additional consequences from commercial providers like banks.

First, any interest due or principal balance forgiven may be treated as a gift to the borrower. Second, you may be able to apply your $16,000 (2022) annual exclusion amount or what is remaining of your lifetime exemption amount if the amount is over the annual exclusion to avoid paying gift tax. Unfortunately, the forgiven interest may still be treated as taxable income to the lender and reported on your tax return. You should consult your tax advisor to fully understand the tax implications.

It is important to consider all options when facing this issue, such as using your annual gift exclusion to help the borrower make payments.


Once weighing all the factors involved, intra-family loans can offer families the flexibility to help provide financing for loved ones outside of the commercial loan industry. jhh wealth works clients and their tax counsel and/or CPA on various financial planning situations like this based on your unique circumstances. Please do not hesitate to connect with a jhh advisor to discuss your special circumstances.

jhh wealth is a registered investment advisor providing financial and investment advice. We discuss only some of the requirements for intra-family loans in this article, and it is not meant to be an instruction manual for how to draft such an arrangement. This should not be used as specific investment or tax advice. jhh does not provide tax or legal advice and you should consult a tax or legal professional before acting on any of the material presented.


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