May I sell property on an installment basis to my children and then decide each year whether or not to forgive $10,000 of the principal and interest as a gift?
Yes. Your annual gift-tax exclusion can be applied to the forgiveness of a genuine installment agreement, provided the amount forgiven is $10,000 or less ($20,000 for gifts made by a husband and wife) per year. For example, if you make a $50,000 loan to your child at 6% interest, you can forgive the $3,000 interest and $7,000 principal (assuming your gift occurred 12 months later) by using your annual gift-tax exclusion. Note: Because the principal has now decreased to $43,000, the 6% interest accrual will be reduced. This permits your annual exclusion to reduce an ever-increasing percentage of the principal, although the interest continues to accrue during years you choose to change or skip your gifting. If you forgave the entire loan after one year, then the $43,000 principal balance could be excluded by using a portion of your Unified Estate and Gift Tax Credit, generally worth $650,000 in 1999 (increasing to $1 million after 2006).
Related Questions
- May I sell property on an installment basis to my children and then decide each year whether or not to forgive $10,000 of the principal and interest as a gift?
- Why not let our trained social workers decide which homes are best for children on a case by case basis?
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