Money may not buy happiness, but it can certainly make some things easier, like helping a family member achieve a life goal. Whether it’s buying a home, starting a business, or paying off debt, intrafamily loans can be a creative and practical option for providing financial support. 

But lending money to a loved one isn’t as simple as shaking hands and agreeing on a repayment schedule. There are tax implications, family dynamics, and legalities to consider. This guide will walk you through what intrafamily loans are, how they work, and the important steps to take to protect relationships while meeting financial goals. 

What Is an Intrafamily Loan? 

An intrafamily loan is a loan given by one family member to another. Unlike gifts, which don’t require repayment, these loans must include interest that’s at least equal to the Applicable Federal Rate (AFR) to avoid being classified as a gift by the IRS. In any given year, one individual (as of 2025) can give another individual $19,000 without needing to file a gift tax form with their taxes, which doubles for those giving from a joint account to $38,000 and is known as “gift splitting”. For those intending to be repaid, with significant wealth to transfer, or simply looking to be equitable to family, memorializing the loan is worth looking into. Generally, these loans offer lower interest rates than commercial loans and tend to be more flexible.

Why Choose an Intrafamily Loan?

Here are a few potential reasons to pursue an intrafamily loan:

• Starting a Business: Entrepreneurs often struggle to secure traditional financing, but family support can provide the funds to get their ideas off the ground.
• Buying a Home: A family loan can serve as a stopgap for securing liquidity to afford a down payment or an entire property.
• Consolidating Debt: With rising interest rates on credit cards and personal loans, borrowing from family at a lower rate can make repayment more manageable.
• Wealth Transfer: Parents or grandparents with substantial assets can use intrafamily loans as a strategy to transfer wealth without triggering hefty gift tax implications.

Nerd Note: According to IRS regulations, the AFR for short-term loans (up to three years) was 5.17% in October 2023. Medium-term loans (up to nine years) and long-term loans (more than nine years) have slightly higher rates. Regularly updating your loan's terms to align with AFR compliance can help avoid unnecessary taxes. 

The Benefits of Intrafamily Loans

When structured correctly, intrafamily loans don’t just offer financial relief, they also come with distinct advantages. 

1. Lower Interest Rates: Compared to what a traditional lender would charge, AFR rates can significantly reduce the borrower’s financial burden.
2. Keep Wealth in the Family: Instead of paying interest to a bank, the borrower pays interest that stays within the family, helping to grow overall familial wealth.
3. Wealth Transfer Without Gift Tax Consequences: Gains from investments made with borrowed funds aren’t subject to lifetime gifting exclusions when the loan complies with tax regulations.
4. Better Accessibility: Banks can be hesitant to lend to people with limited credit or assets. Family loans remove these barriers.
5. Flexible Terms: Families can set up terms that work for both the lender and borrower, like delaying repayments until after a big event (e.g., graduating college or launching a business).
6. Ability to structure as a gift over time: Families may choose to structure the note as a loan to begin with but choose to forgive the loan up to their annual exclusion amount each year. This may be done for equitable transfer or to help align the behavior of the lendee after receiving the loan to continue with certain behavior expressed by the lendor.

Real Example: Imagine that Sam borrows $100,000 from her grandfather at an AFR of 3.5% to start her small business. After one year, her business grows, generating a 15% return on investment. She repays the loan ($100,000 principal + $3,500 interest) and keeps the additional profits, while her grandfather pockets the interest income. Everyone wins.

How to Structure an Intrafamily Loan 

Proper planning and clear documentation are critical for ensuring both financial and relational success. Here’s how to set up an effective intrafamily loan. 

Step 1: Discuss Expectations

Before drafting any agreements, have an honest conversation about goals, repayment expectations, and whether the arrangement makes sense for everyone involved. Transparency reduces misunderstandings.

Step 2: Set the Loan Terms

• Loan Amount
• Interest Rate: Must meet or exceed the AFR for compliance.
• Term Duration: Short-term, medium-term, or long-term.
• Repayment Schedule: Monthly, quarterly, annual, or at the end of the term.

Nerd Note: Keep in mind that failure to charge the AFR minimum can result in the IRS classifying the loan as a gift, which could trigger gift tax filings.

Step 3: Draft a Written Agreement

Include these essential details in your loan agreement:

• Loan amount
• Interest rate and repayment schedule
• Any collateral or co-signers
• Clauses for missed payments

Consider using resources like LegalZoom or eForms for user-friendly templates. 

Step 4: Document Everything 

Record all transactions, payments, and correspondence. This paper trail helps protect both parties in case of disputes or IRS audits.

Tax Implications to Consider 

Even with familial generosity, Uncle Sam has a say. Here's what you need to know about taxes on intrafamily loans.

• Interest Income: The lender must report interest income as taxable on their tax return.
• Annual Gift Tax Exclusion: The lender can forgive part of the loan’s interest annually (up to $19,000 per individual in 2025, or $38,000 for a couple).
• Income Tax for Borrowers: If the loan funds are used for business or investment purposes, borrowers may be able to deduct interest expenses. Consult with a tax professional for guidance.

Nerd Note: If no payments are made on the loan and it’s fully forgiven, the loan may be considered a gift if not planned properly, triggering gift tax implications. Always consult a tax advisor to optimize tax benefits and avoid surprises. 

Weighing the Considerations Before Offering a Loan

Before agreeing to any intrafamily loan, it’s crucial to assess the risks realistically. 

For Lenders:

• Can you afford to lend the money without jeopardizing your own financial security?
• Are you prepared for the possibility that the borrower might not repay the loan?

For Borrowers:

• Are you confident that you’ll be able to make regular payments?
• How might this loan impact your family relationships if financial difficulties arise?

Open, honest communication is key to navigating these complex dynamics.

A Better Way to Support Family Goals 

Intrafamily loans can be a strategic approach for supporting loved ones while creating financial opportunities for both parties. The key to success lies in thoughtful planning, clear communication, and compliance with tax and legal requirements. 

Whether you’re lending or borrowing, consider speaking with a financial advisor or tax professional to ensure the terms align with your family’s needs and avoid unintended consequences. Are you ready to take the next step toward making your family’s financial goals a reality? Start the conversation today.