You want to help a family member - a down payment, a tuition bill, a way out of credit-card debt. The money is the easy part. The harder question is what it is: a loan you expect back, or a gift you don't. That single distinction decides how the IRS treats it, what you have to document, and whether anyone files a tax form.
The core difference
A loan is money advanced with a genuine expectation of repayment. To the IRS, that means three things: a written promissory note, a real repayment schedule, and interest charged at or above the Applicable Federal Rate (AFR) - the minimum rate the IRS publishes each month.
A gift is money given with no expectation of repayment and no strings. Generosity, not a transaction.
Get the structure right and the IRS respects your choice. Get it wrong - a "loan" with no note, no payments, and no interest - and the IRS can reclassify the whole thing as a gift, with the tax consequences that follow.
Why it matters for taxes
If it's a gift
You can give up to the annual gift-tax exclusion - $19,000 per recipient in 2026 - to as many people as you like with no filing at all. Give more than that to one person in a year and you'll usually file a Form 709. Filing rarely means you owe tax. It records the overage against your lifetime exemption (about $15 million per person in 2026), which very few families ever use up.
If it's a loan
You must charge at least the AFR. If you charge less - including 0% - the IRS treats the interest you didn't charge ("forgone interest") as a gift to the borrower, and counts it against that same $19,000 exclusion. The lender also reports the interest actually received as income at tax time.
The $10,000 shortcut: loans of $10,000 or less between individuals are exempt from the imputed-interest rules, as long as the money isn't used to buy income-producing assets. So a small, no-interest family loan creates no gift-tax issue at all.
When a "loan" quietly becomes a gift
The most common way families create an accidental gift is by being too casual. Watch for:
- No note. A verbal "pay me back when you can" isn't a loan the IRS recognizes.
- No payments. If repayment never actually happens, it looks like a gift dressed up as a loan.
- Below-AFR interest. The gap to the AFR is a gift, counted once when you make the loan. On a large loan at little or no interest, it can pass the annual exclusion on its own.
- Forgiveness. Forgiving a balance converts that amount into a gift in the year you forgive it.
So which should you use?
Use a loan when you expect to be repaid, when the amount is large enough that you'd rather not spend down your lifetime exemption, or when you want to set clear expectations - especially helping someone out of debt, where structure is the point. Use a gift when you mean to give it, the amount fits within the annual exclusion, and you don't want repayment hanging over the relationship.
Many families do both: a documented loan for the bulk, and a gift of part of the interest or principal each year within the exclusion. Done on purpose, that's clean.
How to do a loan properly
If you land on a loan, three steps keep it a loan: write a promissory note with the terms, set a repayment schedule (an amortization table), and charge at least the AFR for the loan's term. The step-by-step guide is linked below.
Frequently asked
Is a family loan taxable income to the borrower?
No. Borrowed money isn't income. The lender, however, reports the interest they receive as income.
Do I owe tax if I file a Form 709?
Almost never. A 709 records gifts above the $19,000 annual exclusion against your ~$15M lifetime exemption. You only owe gift tax once that's used up.
Can I forgive a family loan later?
Yes, but the forgiven amount becomes a gift in the year you forgive it, and counts against the annual exclusion that year.
This guide is general information, not tax or legal advice. Gift and AFR rules change; confirm current figures with the IRS and consult your CPA or attorney before acting.
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