How to Help Your Child Purchase a Home When Rates are High
10 Best Practices to Protect Your Family—and Your Finances
It’s a beautiful thing to help a child or loved one get started in life—especially when it comes to big milestones like purchasing a first home. Many of our clients want to assist their children financially, often by contributing to a down payment or stepping in as a lender when traditional financing falls short.
But good intentions aren’t enough. If not structured properly, these “intrafamily loans” can lead to unexpected tax consequences, strained family dynamics, or even scrutiny from the IRS.
Here’s how to lend money to family the right way—with professionalism, clarity, and legal protection for everyone involved.
- Put It in Writing with a Promissory Note
A handshake deal won’t cut it. The borrower should sign a clear, formal promissory note laying out the loan terms—amount, interest rate, repayment schedule, and consequences for default.
- Set a Fixed Repayment Schedule
Establish a timeline for repayment (monthly, quarterly, or annually), just as a bank would. This shows that both parties take the loan seriously and helps avoid confusion later.
- Charge Interest at or Above the IRS “Safe Harbor” Rate
The IRS publishes minimum interest rates (Applicable Federal Rates or AFRs) that must be charged to avoid the loan being treated as a gift. Always charge at least the applicable AFR to avoid tax headaches.
- Request Collateral When Appropriate
Depending on the size of the loan, you may want to secure the loan with collateral—especially for real estate transactions. This adds an extra layer of protection and reinforces the seriousness of the loan.
- Enforce Repayment Obligations
It may feel awkward, but if the borrower misses payments, don’t ignore it. Treating the loan like a real debt helps preserve its integrity, both legally and relationally.
- Maintain Detailed Records
Both lender and borrower should keep documentation of the loan, including copies of the promissory note, payment receipts, and correspondence.
- Track and Show Evidence of Payments
Demonstrating that the borrower is actually making payments is crucial. Cancelled checks, bank transfers, or payment receipts help establish that the loan is active and legitimate.
- Assess the Borrower’s Ability to Repay
Before lending, consider whether your child or family member can realistically repay the loan. You want to help—not create a burden or trigger legal disputes down the road.
- Avoid Plans to “Forgive” the Loan Over Time
Forgiving payments as they come due may convert the loan into a gift in the eyes of the IRS—bringing potential tax consequences. If you want to make a gift, do so directly and within annual gift tax exclusion limits.
- Refinance with Caution
Refinancing an intrafamily loan may be appropriate in some circumstances, but it should be approached carefully and with legal guidance. Make sure all changes are documented and that you don’t inadvertently reset terms in a way that triggers gift tax issues.
Why It Matters
A poorly structured loan can derail even the best family relationships and draw unwanted IRS attention. On the other hand, a well-structured intrafamily loan can be a powerful estate planning tool—allowing you to transfer wealth responsibly while helping your loved ones thrive.
At Nickerson Law Group, we regularly help families structure intrafamily loans through carefully drafted, secured promissory notes—especially when parents want to help their children buy a home. We ensure that everything is legally sound, tax-efficient, and aligned with your broader estate planning goals.
