What’s the best way to help my relative with their mortgage?

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Q. I have a family member who has a mortgage. I would like to assist in reducing the mortgage principal due to these inflationary and uncertain financial times. I considered offering a loan with a low interest rate, but learned that the IRS has prescribed interest rates in such instances. The present interest rate set by the IRS is greater than the current interest rate on the mortgage. The principal amount of the mortgage exceeds the annual gift limit established by the IRS. Is there a way that I can loan/gift money without incurring penalties from the IRS
— Trying to help

A. You have several choices.

Each has its own consequences.

The easiest option is to make an outright gift, said Michael Karu, a certified public accountant with Levine, Jacobs & Co. in Livingston.

There is an annual exclusion for any gifts up to $17,000 going from any one person to any other person, he said. That means that no gift tax returns are required to be filed.

“Any gifts exceeding $17,000 would require the filing of a gift tax return, but, under most circumstances, would not be taxable as the excess would be applied against your lifetime exclusion, which in 2017 is $12.92 million,” Karu said.

But, he said, you should keep in mind that the prepayment of a portion of the mortgage principal may not reduce the monthly payment, just shorten the life of the mortgage.

You referenced that it is a family member who has the mortgage.

Karu cited a 1965 court case, Crown vs. Commissioner of IRS, in which the following ruling was handed down by the United States Court of Appeals, Seventh Circuit.

“The primary question presented in this appeal is whether a taxpayer who lends money to his children and other close family members in the form of no-interest loans and open accounts payable on demand must include in the computation of gifts taxable during a particular tax year the value of the interest foregone on the indebtedness outstanding during that year. The tax court ruled in favor of the taxpayer’s argument that no taxable gift occurred. We affirm.”

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This story was originally published on May 16, 2023.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.