Can I Loan My Child Money to Buy a House: IRS Rules and Rates

Yes, you can loan your child money to buy a house, and the IRS will treat the arrangement as a legitimate debt as long as you charge at least the federal minimum interest rate and document the loan the way a bank would. Skip either step and the IRS can recharacterize the whole transaction as a taxable gift. Done correctly, a parent loan can save your child tens of thousands in interest compared to a conventional mortgage while giving you a modest, secured return on the money.

The Minimum Interest Rate You Have to Charge

Federal tax law does not let you lend money to your child interest-free and call it a loan. Every intrafamily loan must charge at least the Applicable Federal Rate (AFR), a benchmark the IRS publishes each month.¹ Which AFR applies depends on the length of the loan:

Short-term (3 years or less): 3.59% annually as of March 2026
Mid-term (over 3 years, up to 9 years): 3.93% annually
Long-term (over 9 years): 4.72% annually

Rates reset monthly, so lock in the rate published for the month you actually fund the loan.² A 15- or 30-year home loan uses the long-term rate. That rate sits well below current conventional mortgage rates in the 6–7% range, which is where the savings for your child come from.

If you charge less than the AFR, the IRS treats the difference as “imputed interest.” You pay income tax on interest you never actually received, and the same forgone interest is treated as a gift from you to your child, which can trigger gift tax reporting.¹ Undercharging costs more than just charging the rate.

Exceptions for Smaller Loans

Two statutory carve-outs soften the AFR rules for smaller amounts. If the outstanding balance never exceeds $10,000, the imputed interest rules do not apply at all and you can charge zero interest. This exception disappears if the money is used to buy income-producing assets like a rental or investment account, but a primary residence your child lives in is fine.¹

For loans between $10,001 and $100,000, imputed interest still applies in theory, but the taxable amount is capped at your child’s net investment income for the year. If your child earns $1,000 or less in investment income, that figure is treated as zero, which effectively wipes out the imputed interest.³ Above $100,000, the full AFR rules apply with no cap.

Documentation That Proves It Is a Loan

In the IRS’s view, the line between a loan and a gift is paperwork. A verbal understanding between family members looks identical to a tax-free wealth transfer, and the IRS treats it that way.

The Promissory Note

Every intrafamily loan needs a written promissory note signed by both of you. It creates the legal obligation to repay and should state the loan amount, the interest rate (at or above the current AFR), a specific repayment schedule with due dates, the maturity date, and the consequences of missed payments. Include an acceleration clause letting you demand the full remaining balance on default. That clause is standard in commercial lending and signals genuine intent to collect.

Recording a Mortgage or Deed of Trust

Recording a mortgage or deed of trust against the home is the step families most often skip, and it matters more than any other. Recording places a lien on the property and puts you in the same legal position as a bank. It also makes the loan a matter of public record, which protects your interest if the property is sold or if other creditors surface.

Recording also unlocks the biggest tax benefit for your child. The IRS only allows a home mortgage interest deduction when the debt is “secured,” meaning a recorded instrument ties the home to the loan and gives the lender the right to pursue the property in a default.⁴ Without recording, your child cannot deduct the interest they pay you. Filing fees at the county clerk’s office are typically under $150.

Signatures, Ledger, Retention

Notarize the signatures. Keep a payment ledger showing every payment your child makes, with the date, amount, and the split between principal and interest. Hold both digital and physical copies of the note, the recorded mortgage, and the ledger for the life of the loan plus at least seven years, the IRS retention window for bad debt claims.⁵

Your Child’s Mortgage Interest Deduction

When the loan is documented correctly, your child can deduct the interest they pay you the same way they would deduct interest on a bank mortgage. Three conditions apply: your child must itemize on Schedule A, the loan must be a secured debt on a qualified home, and both parties must genuinely intend the loan to be repaid.⁴

“Secured debt” means a mortgage or deed of trust makes the home collateral and that document is recorded under state or local law. An unrecorded promissory note, however detailed, does not qualify.⁴ The recording step is the gateway to the deduction.

What You Have to Report on Your Own Taxes

Interest your child pays you is taxable income to you, whether or not anyone issues a 1099-INT. Once the interest crosses $1,500 in a year, you file Schedule B with your Form 1040. The IRS also specifically requires Schedule B for interest received on a seller-financed mortgage where the buyer uses the property as a personal residence, which is what a parent-to-child home loan is.⁶

You may also need Form 709, the gift tax return. It comes into play if you charge below the AFR, waive interest, or forgive part of the loan, and the filing threshold is any gift above $19,000 per recipient in 2026. Filing does not necessarily mean you owe tax. Form 709 tracks use of your lifetime gift and estate tax exemption, which is $15,000,000 for 2026.⁷ Most parents will never exceed that, but the return itself is mandatory once you cross the annual threshold.

If Your Child Also Needs a Bank Mortgage

When you are lending only part of the purchase price and a bank is financing the rest, your loan changes the underwriting picture in three ways.

Debt-to-Income Ratio

The monthly payment your child owes you counts as a recurring debt. Lenders add it to credit cards, car loans, and student debt when calculating debt-to-income ratio. Fannie Mae’s standard maximum total DTI is 36% of stable monthly income, stretching to 45% for strong credit profiles.⁸ The payment to you can push your child over that ceiling and shrink the loan a bank is willing to write.

Subordination

A conventional lender will typically require a subordination agreement putting the bank in first lien position. Your lien drops to second, which means the bank collects first if the property is foreclosed. Fannie Mae’s guidelines also require that monthly payments on any subordinate financing cover at least the interest due, preventing negative amortization on your loan.⁹

Gift Versus Loan

Underwriters draw a sharp line between gifts and loans. A gift needs a letter from you confirming no repayment is expected.¹⁰ A loan is formal debt that raises your child’s obligations. If your child is putting down the FHA minimum of 3.5%, those funds generally must be a gift rather than a loan, because FHA rules require family down payment funds to carry no expectation of repayment.¹¹ Loaned funds can cover part of the purchase in some cases, but only if the loan is fully secured by other assets like an investment account, and the money cannot come from the seller or any interested party.

Disclose the Loan

Never leave the parent loan off a mortgage application. Automated underwriting systems flag unexplained deposits, and a second lien will surface in the title search. Undisclosed financing is mortgage fraud under 18 U.S.C. § 1014, and even without criminal exposure the immediate result is a denied application.

Forgiving the Loan Over Time

Some parents lend with the intent to forgive the balance gradually. The IRS allows this within the gift tax framework. Each year, you can forgive up to $19,000 of the balance per child without filing a gift tax return or using any of your lifetime exemption. If your spouse joins the gift, the combined annual forgiveness is $38,000.¹²

One catch trips people up. Forgiving interest does not eliminate income tax on that interest. You had the right to receive it, you chose not to collect, and then you gifted it. Those are two separate tax events. Annual forgiveness keeps you inside the gift exclusion but does not remove the income tax on interest you were entitled to collect. On a large loan, unwinding this way takes years. A tax advisor can map the annual forgiveness against your other giving.

If Your Child Stops Paying

A recorded mortgage or deed of trust gives you the same right to foreclose that a bank would have, following the process for your state.¹³ Judicial-foreclosure states require a lawsuit; non-judicial states use written notices under a power-of-sale clause. Foreclosing on your own child is rare, but the fact that you legally could is part of what convinces the IRS this is a real loan.

If you absorb the loss instead, you may be able to claim the unpaid balance as a short-term capital loss on your return. The IRS reviews these claims closely and will expect proof that you tried to collect and that the debt is genuinely worthless rather than forgiven as a family favor. A bad debt deduction also extends the usual limitations period, which is why the seven-year document retention rule matters.⁵

The most useful protection is built into the loan at the start: a repayment schedule tied to your child’s actual income, perhaps an interest-only period in the early years, and an open conversation about what will happen if their circumstances change.

1
Office of the Law Revision Counsel. 26 USC 7872 – Treatment of Loans With Below-Market Interest Rates
2
Internal Revenue Service. Revenue Ruling 2026-6 – Applicable Federal Rates for March 2026
3
Internal Revenue Service. Publication 550 (2025), Investment Income and Expenses
4
Internal Revenue Service. Publication 936 (2025), Home Mortgage Interest Deduction
5
Internal Revenue Service. How Long Should I Keep Records?
6
Internal Revenue Service. About Schedule B (Form 1040), Interest and Ordinary Dividends
7
Internal Revenue Service. What’s New – Estate and Gift Tax
8
Fannie Mae. Debt-to-Income Ratios – Fannie Mae Selling Guide
9
Fannie Mae. Subordinate Financing – Fannie Mae Selling Guide
10
Fannie Mae. Personal Gifts – Fannie Mae Selling Guide
11
HUD. Section B – Acceptable Sources of Borrower Funds Overview
12
Internal Revenue Service. Instructions for Form 709 (2025)
13
Consumer Financial Protection Bureau. How Does Foreclosure Work?