How to lend money to your kids

Your daughter has found a condo. The bank will lend her most of the price, and she is $30,000 short of the down payment. You have it, you want to help, and you would rather she paid you back than walked away with a gift that her brother never got. That is a family loan, and it goes well when both of you can say, a year from now, exactly what was agreed.

Decide what it is before the money moves

The first decision is whether this is a gift or a loan, and the honest answer is sometimes "a gift I would like to be repaid". That is a gift. Say so, and if the amount is over the annual exclusion, file the gift tax return. In 2026 you can give any one person up to $19,000 without reporting it, or $38,000 from a married couple, and nothing is owed until lifetime gifts pass $15 million. For most families a gift of this size costs nothing but a form.

If you expect the money back, it is a loan, and it needs to look like one. The IRS looks at the same things a judge would: a written note, a fixed rate, a schedule, actual payments, and some evidence that you would have pursued the debt if payments stopped. Money handed over with "pay me back when you can" tends to be treated as a gift when anyone looks at it later, which matters at tax time and matters more when an estate is divided.

Agree the terms, then write them down

Four numbers settle most of it:

• The amount. Only what is being lent, not what was spent on the move.
• The rate. See the next section. Zero is allowed; it is not free.
• The term and the schedule. Five years of monthly payments is a common shape for a down payment loan. Shorter if she can manage it, longer if the payment would crowd out the mortgage.
• What happens if a payment is missed. A grace period, a late charge or none, and how many missed payments before the whole balance is due.

Put those into a promissory note, sign it, and each keep a copy. A note does not need a lawyer for a loan of this size, but it does need the parties' names, the amount in words and figures, the rate, the schedule, the late terms, and the state whose law applies. Our guide to what a promissory note must say walks through each clause, and the template shows a finished one.

If the loan is helping buy a home and you want it secured by the property, that is a deed of trust or mortgage recorded with the county, which is a lawyer's job. Secured loans have a tax advantage for the borrower (the interest can be deductible as home mortgage interest when the debt is recorded against the home), and they are the loans estate lawyers like best, because nobody can later pretend they were gifts.

Charge at least the applicable federal rate

Section 7872 of the tax code says that if you lend to a relative below a published minimum, the IRS treats the interest you did not charge as if you had charged it and then given it back. The minimum is the applicable federal rate, set each month. For October 2026 the rates are:

• 4.25% for loans of three years or less
• 4.61% for loans over three and up to nine years
• 5.22% for loans over nine years

Pick the rate for your loan's term from the month you sign, write it into the note, and it is fixed for the life of the loan. It does not float with later months.

Two exceptions take smaller loans out of the rules. If the total you have lent that child is $10,000 or less, and the money is not used to buy stocks, bonds or a rental, the section does not apply at all, so an interest-free loan for a used car or a security deposit is fine. If the total is $100,000 or less, the interest the IRS imputes to you is capped at your child's net investment income for the year, and if that income is $1,000 or less it is treated as zero. Many parents rely on that second exception to lend at no interest.

Relying on it has two costs. The forgone interest is still a gift each year, which counts against the $19,000 exclusion. And an interest-free loan looks less like a loan, which weakens your position if the question of gift or debt ever comes up. Charging the AFR is the cleaner answer. On $30,000 over five years at 4.61% the monthly payment is $561 instead of $500, and the total interest is $3,648 over the whole term. That interest is taxable income to you; your daughter cannot deduct it unless the loan is secured by the home.

Run the numbers before you sign

Here is the loan in the example, written on 15 October 2026:

• Principal: $30,000
• Rate: 4.61%, fixed, the mid-term AFR for October 2026
• Term: 60 monthly payments starting 15 November 2026
• Payment: $560.79
• Total interest over the term: $3,648

The first payment is $115 of interest and $446 of principal. By the last payment almost all of it is principal. A full amortization schedule shows every payment split that way, and the loan calculator will produce one for any amount, rate and term.

Check the payment against her budget alongside the mortgage, not instead of it. A down payment loan that forces her to miss a mortgage payment helps nobody. If $561 is too much, lengthen the term to seven years ($418 a month at the same rate) rather than cutting the rate below the AFR.

Fund it in one traceable transfer

Send the money by bank transfer or check, on the date the note says, and keep the confirmation with the note. A single dated transfer that matches the note is the best evidence there is that a loan was made. Cash, or a series of transfers spread over months, invites the question of what each one was.

If the lender for her mortgage asks where the down payment came from, a loan from a parent usually has to be disclosed and may change what they will lend. Tell her to ask her loan officer before the money moves.

Keep the record as you go

Most family loans do not go wrong at signing. They go wrong in year three, when payments have been irregular, nobody is sure of the balance, and a sibling asks whether the loan was ever real. The defence is a ledger: every payment, dated, with the interest and principal it covered, and a running balance both of you can see. A spreadsheet works if someone keeps it. NoteHouse keeps it for both parties, confirms each payment with the other side, and sends the reminder before each due date so that you never have to.

Report the interest on your return each year. For a loan of this size there is no Form 1099 to issue; the interest goes on Schedule B as interest received from an individual. Your accountant will want the year's total and your daughter's name and address.

When payments slip

Say what will happen before it happens. A missed payment should produce a note, not a conversation about character. The promissory note's late terms do that work: a ten-day grace period, then a late charge, then after two or three missed payments the right to call the balance due. You may never use the last of those, but having it written down is what makes the loan a loan.

If her circumstances change for good, change the loan in writing. A lower payment over a longer term, documented in a signed amendment, keeps the debt alive. Quietly stopping collection does the opposite: the IRS can treat the forgiven balance as a gift in the year you give up, and the family history records that one child was forgiven a debt the others paid.

If you decide to forgive it later

You can. Forgiveness is a gift of the remaining balance in the year you forgive it, so it uses that year's $19,000 exclusion and the lifetime exemption above that. Parents who plan to forgive a loan sometimes forgive a slice each December, inside the exclusion, and keep collecting the rest. That is allowed when the loan was genuine from the start and the forgiveness is a separate decision each year. A loan written with the intention of never collecting is a gift from day one, and will be treated as one.