You must be aware of this when borrowing money from the family
In many families, mutual support is a matter of course. Also, the often free or cheap lending money is one of them, so the awarding of family loans is no longer a rarity. Often, however, they are sealed with a handshake without, however, knowing that lending money within the family is also a legal deal, with all its rights and obligations.
What is a family loan?
A family loan is a credit model that is explicitly offered by and for the family. A situation in which families often rely on this form of money transfer is the birth of a child and the associated loss of earnings. Since the parental allowance is often not sufficient to continue to make a living, this is a welcome cash injection.
Of course, there are other reasons why a cheap family loan is used. For example, low interest rates make it worthwhile for many to think about taking out such a loan, such as rescheduling a costly old credit agreement.
Since a loan can often be processed faster and less bureaucratic, as without credit bureau information, it is extremely popular and is finding more and more who take it.
Tax Benefits Family loans for rented property
For example, if a family loan is given to a child, it usually has a positive effect on both sides. Example: The child receives from his parents a higher amount to finance a house to rent. For the repayment, the child pays monthly interest to the parents.
The advantage for the child is that it usually has to pay less interest than the bank. The parents, on the other hand, receive higher interest rates than the bank itself. Again, the child, as landlord of the house, may deduct so-called debt interest from the rental income as income-related expenses.
It should be noted in this example that a deduction of interest on debt only exists for real estate, which are also rented. In the case of homeownership, in which people also live, this tax-saving model does not apply.
Yet another advantage is that the interest payments of the child for the parents represent interest income, which are tax-free, if the saver charges of 801 euros for single people and 1602 euros for married people are not exceeded.
Examination by the tax office
The tax office considers family loans rather critical because of its high number of abusive options.
If a larger loan without interest and fixed term is agreed to z. For example, to save the gift tax, the tax office must credibly be assured that it is actually a loan and not a donation.
Furthermore, tax officials look more closely at the loan contracts with relatives, as both parties have the same interests and usually one does not want to hurt the other. For contracts with banks, on the other hand, everyone is looking for their own benefit.
Good to know:
According to § 15 of the Tax Code, close relatives include relatives and first-degree relatives, spouses, siblings, fiancée, children of siblings, spouses of spouses and siblings of spouses, siblings of parents, foster parents and foster children.
Tips for family loans
A contract should be created
A credit agreement should not be concluded by handshake but in the form of a written contract. It does not require any particular form, but it serves to ensure the security of both parties. The tax office demands a written loan contract when claiming tax benefits and only recognizes this if the loan was granted as under “strangers”, which is similar to banking.
Unlike many other contracts, the contract does not have to be written by computer or even authenticated and certified by a notary. It is sufficient if the loan agreement is held by hand on a DIN A4 sheet. It is important, however, that the handwriting is easy to read, so that no doubts arise over the authenticity and content of the contract.
The contract for the family loan should contain at least the following information:
- Names and addresses of the contracting parties
- Amount of the loan amount
- interest rate
- Term contract
- repayment arrangements
- Due date installments
- Settlement of legal consequences for late payments and possibly also a regulation on termination of the loan agreement
- Place, date and signatures of all involved
No creation of fake contracts
Financial officials are particularly suspicious if the contract stipulates too high an interest rate. Since the debtor wants to deduct this in a rented property from the tax, the tax office is suspected of suspected tax fraud. The interest, which is in the contract, must also be fulfilled.
Therefore, tax officials are also particularly checking the repayment and fulfillment of this agreement. If these prove to be a fictitious contract, tax advantages, no matter in which amount, are no longer possible.
Anyone who does not want to expose themselves to the suspicion of a pseudo-contract should be able to prove repayment at any time. Even in the event of sudden family disputes, there should always be proof of repayment. Therefore, it is advisable to settle repayments exclusively via a bank account by bank transfer. The entire cash flow can thus be tracked and proven. Payments in cash should be avoided. Especially when tax benefits are claimed.
Loans within the family are common, but unfortunately also cause disputes if the loan is to be repaid. Therefore, the cash flow should always be proven.
Separate bank accounts
For the reasons mentioned above, it is recommended that each of the parties should have a separate bank account. The payee and the payer may not have the same account identity.
Payment protection insurance
At the latest with sums in the high four-digit range or far beyond, which are completed even without collateral, banks recommend the conclusion of a residual debt insurance. These are common in lending by banks. For small amounts, it is still optional, but at the latest when buying a property, this is mandatory at banks.
Due to the high financial risk, it is worthwhile to take a closer look and to consider it. If the insurance is taken out on a bank loan, the bank’s proposed insurance is usually taken. In a family loan, however, this is freely selectable.
The borrower always has the right to look for policies with better terms and insurance coverage. Above all, it has to be examined how the insurance company behaves in the event of a repayment default and who is liable for the repayment.
Also should be included:
- temporary or permanent incapacity for work of the borrower
- Unemployment of the borrower
- Death of the policyholder
- Loss of revenue from loans for the family business
Normally, the private lending and repayment within the family easily. However, if there are discrepancies, inter alia, in the eradication, lawyers are often turned on. To avoid this, certain forms must be observed. If tax regulations are followed, nothing is in the way of the low-cost loan.