An intrafamily loan is a financial agreement where funds are lent between family members, typically for significant financial needs such as the purchase of a home. Unlike traditional loans from financial institutions, intrafamily loans can be customized to better suit the financial situations of both parties involved.  Flexibility is key but some rules must be followed to avoid tax consequences. 

1. Lower Interest Rates: 
With the long-term AFR at just 4.5%, intrafamily loans can be a more cost-effective option compared to the current average mortgage rate of over 7%. This lower rate can result in significantly reduced monthly payments and overall interest cost.

Example: Consider two scenarios where a family needs a $300,000 loan to purchase a home. With a traditional mortgage at 7%, the monthly payment (principal and interest only) would be approximately $1,996.

However, with an intrafamily loan at 4.5% AFR, the monthly payment drops to about $1,520. This translates to a monthly saving of $476.

2. Flexibility in Loan Terms: Families can tailor the repayment terms to accommodate the borrower's financial situation, such as adjusting the payment schedule or offering interest-only payments for a period.  However, this MUST be structured as a LOAN and not a gift!  The Tax Courts often see "disguised loans" which are really gifts.  It is important to actually make payments on the loan.

3. Simplicity and Speed vs Traditional Lending: Setting up an intrafamily loan often involves less paperwork and bureaucracy than obtaining a mortgage from a bank. This can make the home buying process quicker and less stressful.   For our investor clients, this means a quick close and beating the competition who is waiting for their loan to close. 

Bill and Mary, Anomaly clients, wanted to buy their first home but were deterred by high mortgage rates. Mary’s parents offered an intrafamily loan of $300,000 at an interest rate equal to the long-term AFR of 4.5%. 

Over the 30-year term of their loan, John and Mary are expected to save over $100,000 in interest compared to a conventional mortgage at 7%.  Mary's parents were able to obtain financing by borrowing from their overfunded high cash value life insurance at a cost of 4.5%.  This was a unique opportunity they saw not to make money but to save significant interest for their children while still being made whole.

If you are interested in learning more about intrafamily loans, drop us a note in Soraban!