If you have healthy finances and your family members don't, making intrafamily loans might seem like a good idea.
Intrafamily loans made at below-market interest rates can raise the reddest of flags.
If you make a sizable loan, you may have to report taxable interest income even if you didn't charge any. And if you report taxable interest income, the borrower may not be able to deduct the hypothetical interest expense. Ill-planned intrafamily loans can also trigger the gift tax. In addition to the loans themselves, foregone interest and forgiveness of bad debts can create gift tax, because the IRS may consider these items as income to the recipient. Here are seven tips for avoiding tax traps on intrafamily loans.