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Mortgage Planning with Family Loans: What Massachusetts Families Should Know
Buying a home is one of the biggest financial decisions a family can make. In today’s competitive real estate market, many buyers receive help from family members. While gifting money is common, an intrafamily loan can often be a smarter and more flexible alternative, especially when Massachusetts estate tax rules are considered.
Below is an overview of how family loans work, why families use them, and why proper legal structure is critical.
What Is a Family Loan
A family loan is a loan from one family member to another, most commonly a parent to a child, to assist with major financial goals such as purchasing a home, starting or expanding a business, or addressing a significant personal or financial need.
When structured correctly, the transfer is treated as a true loan rather than a gift. This distinction is important for tax, estate, and long term planning purposes.
Why Families Use Family Loans for Home Purchases
Intrafamily loans are increasingly used in Massachusetts real estate transactions because they provide flexibility and strategic advantages.
Common benefits include the ability to help a buyer make a stronger offer by effectively acting as a cash buyer. Repayment terms can be customized to fit family circumstances. These loans may be paid off or refinanced later with a traditional mortgage. Properly structured loans may also reduce the lender’s taxable estate over time, which can be especially relevant given Massachusetts estate tax thresholds.
What the IRS Looks For
To ensure a family loan is treated as a loan and not reclassified as a gift, the IRS evaluates how the loan is documented and administered.
Key factors include interest charged at or above the Applicable Federal Rate, a written promissory note, a defined repayment schedule, and consistent documentation and follow through on payments.
If these elements are missing, the IRS may determine that the transaction was not a true loan.
Why Proper Documentation Matters
When a family loan is not structured correctly, the IRS may treat the transfer or even forgiven or skipped payments as a gift. This can result in unexpected gift tax consequences, increased estate tax exposure, and complications during refinancing or future property transfers.
Maintaining detailed records and proper legal documentation helps protect both the borrower and the lender and ensures the loan holds up under scrutiny.
Speak With a Massachusetts Attorney Before Moving Forward
Family loans can be an effective planning tool when handled properly. A Massachusetts real estate attorney can assist by drafting the required promissory notes and loan documents, coordinating with lenders and loan officers, ensuring compliance with IRS and state regulations, and aligning the loan structure with broader estate planning goals.
Sherman Law Can Help
If you are considering helping a family member purchase a home through a family loan, it is important to speak with an experienced Massachusetts real estate attorney before moving forward.
With offices in Hingham, Plymouth, Boston, and Dartmouth, we focus exclusively on residential real estate. Our attorneys and paralegals use modern tools to streamline each closing. Most importantly, we stay available when you need us—not just 9 to 5.
📞 Call or text us at 781-664-4936
📧 Email: [email protected]
