How much money can you loan a family member?

What Are Intra-Family Loans?

Intra-family loans are lending arrangements between family members (typically from parents to children or from grandparents to grandchildren). Unlike casual gifts or an “I owe you,” these are actual loans with terms like principal amounts, interest rates, repayment schedules, and security provisions.
Intra-family loans must charge a minimum interest rate known as the Applicable Federal Rate (AFR), which is published monthly and varies based on the loan term. You can view AFRs as of February 2026 here.
This is because of IRS rules. If you don’t comply with IRS rules, intra-family loans can be treated as gifts, which could trigger gift tax consequences.
AFRs are low compared to commercial lending rates. For example, a traditional mortgage might have a 7% interest rate, but a parent could lend to their child at the current AFR of around 4-5%.

How do Intra-Family Loans help with Debt Management?

1. Refinancing High-Interest Debt

Many young adults have debt from things like student loans. By providing an intra-family loan at the AFR, parents can help their children refinance, reducing interest costs and speeding up payoff. This is a win-win: in addition to the money saved by the kid, the parent earns a return that could exceed what they’d receive from investment accounts.

2. Supporting Major Purchases

Intra-family loans are often used to help children buy homes, especially in expensive housing markets like the San Francisco Bay Area where down payments are high. Intra-family loans (instead of gifting the down payment) are attractive since gifting reduces your lifetime gift tax exemption.

Intra-family loans can also be used to help family members fund businesses without high interest rates or equity dilution associated with traditional business loans.

How do Intra-Family Loans support Multi-Generational Planning?

Wealth Transfer

When a parent lends money at the AFR, the difference in returns effectively transfers wealth to the next generation without using gift tax exemptions. For example, if a parent lends $500k at 4.5% to their adult child who invests it into real estate that returns 10% annually, the 5.5% differential in returns flows to the child, transfer tax-free.

Keeping Estate Tax Exemptions

The current federal estate and gift tax exemption is $15 million per individual (as of 2026). By using intra-family loans instead of gifts, families can transfer wealth while keeping their gift and estate tax exemptions for other planning strategies. The loan repayments will gradually move assets back to the senior generation’s estate, but the appreciation on it benefits the younger generation.

What are Common Intra-Family Loan Structures?

• Traditional Term Loans: Straightforward loans with a fixed principal amount, interest rate (at or above AFR), and regular payment schedule (monthly, quarterly, or annually). They work well for home purchases, business funding, or debt refinancing.
• Interest-Only Loans with Balloon Payment: The borrower only pays interest during the loan term, with the principal due at maturity. This minimizes cash flow burden on the borrower, though it requires planning for the ‘balloon’ payment.

• Demand Loans: Payable on demand by the lender and use short-term AFRs. They require annual interest rate adjustments for current AFRs.
• Self-Canceling Installment Notes (SCINs): Include a provision that cancels the remaining debt if the lender dies before the loan is repaid. SCINs require a premium interest rate or principal amount to compensate for the cancellation risk, but can remove significant assets from the estate.

Intra-Family Loan Example

Sarah and Michael want to help their daughter Emma, age 30, buy an $800k home. Emma has $100k for a down payment but needs $700k for the mortgage.

Traditional Approach: Emma would get a mortgage at 7% interest, resulting in monthly payments of roughly $4,657 (principal and interest on a 30-year loan). After 30 years, her interest paid would be over $977,000.

Intra-Family Loan Approach: Sarah and Michael lend Emma $700k at the current long-term AFR of 4.5% for 30 years.

Emma’s monthly payment would be approximately $3,546, and her total interest over 30 years would be around $577,000. This means she would save almost $400k.

Tax Implications:

• Sarah and Michael report approximately $31,500 in interest income annually.
• If properly secured, Emma can deduct the interest as qualified residence interest.
• Sarah and Michael keep their estate tax exemptions while earning better returns than if invested in a low risk portfolio.
• The $400,000 in savings effectively transfers to Emma without using gift exemptions.

Disadvantages of Intra-Family Loan Planning

• Documentation: Intra-family loans require formal documentation like promissory notes, security agreements, and potentially mortgages. Informal arrangements risk the IRS treating it as a gift.
• Compliance: Payments must be made and documented. The lender must report interest income.
• Estate Inclusion: Outstanding loan balances are included in the lender’s estate, which may cause higher estate taxes.

If used correctly, intra-family loans can help high net worth families with their multi-generational financial plans.

A properly structured intra-family loan lets family members lend money at favorable interest rates while also helping manage debt, transfer wealth, support your family members’ financial goals, and create tax advantages for the lenders and borrowers.

However, complex regulations and the difficulty of mixing family and money make them something to seriously consider before moving forward.

As always, we recommend working with a professional who understands both tax strategies and wealth management.