Lending money to an adult child, whether for a home down payment, covering the tax bill on exercising stock options, or bridging a liquidity gap before an exit, is one of the more common ways family capital moves before death.

Done informally, the IRS can consider the whole thing as a gift; done properly, it's a loan with interest that can be partially or fully forgiven over time using the annual gift tax exclusion.

The starting point is the Applicable Federal Rate (AFR), a minimum interest rate the IRS publishes monthly and tiers by loan length. If the loan charges less than the AFR, the IRS acts as though the full AFR interest rate was charged. The parent then owes income tax on interest they never actually collected, and the gap between what was charged and the AFR is treated as a gift to the child.

The appeal is that the AFR is typically one to three percentage points below what a bank would charge. A parent lending $2M to a child to buy a home at the long-term AFR gives the child a below-market rate and keeps the interest inside the family rather than going to a bank.

The interest the child pays is taxable income to the parent each year, which is where the annual gift tax exclusion comes in. In 2026, a parent can give up to $19,000 per recipient without filing a gift tax return or touching the lifetime exemption. So, a married couple can jointly give $38,000 to a child, or $76,000 to a married child and their spouse.

Applied to the loan, the parent can gift money to the child each year up to the exclusion amount, and the child can use that gift to make the interest payment. The loan stays in place, the interest is paid and documented, and the net cost to the child is reduced. The cleaner the paper trail between the gift and the payment, the stronger the position if the IRS ever looks at it.

A few things have to hold for the structure to work:

The loan needs a signed promissory note, a stated rate at or above the AFR, a repayment schedule, and interest that actually gets paid or accrues. The borrower should have a plausible ability to repay at origination, and forgiveness should be decided year by year rather than baked into the loan up front.

On home loans, the mortgage interest is only deductible to the borrower if the loan is secured by the home and recorded with the county. If the overall arrangement looks like a gift dressed up as a loan, the IRS can collapse the whole principal back into a gift made on day one.

For families already planning gifts to children or grandchildren, an intrafamily loan is a way to move larger amounts of capital at favorable rates while still using the annual exclusion for what it's designed to do.

For educational purposes only. Not tax, legal, or investment advice.