How much interest should I charge for a private mortgage?

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The house next door is in pre-foreclosure. Prior to the start of the foreclosure, we found some tenants for the owner who are living rent free in return for fixing up the place.
At 6% interest on a 30 year loan, they would be paying roughly what they were renting an apartment for before moving in next door.
I’d like to keep the current people as they are good hard working folks.
However, they are refugees from Chavez’s Venezuala and cannot qualify for a loan as they have no established credit in the US.
I will be making the loan from my IRA. Will the IRS have any issues with me making the loan under what would be considered a fair rate considering the risks?

  1. Reply
    May 4, 2011 at 12:11 am

    I don’t think the IRS give a fig about what you loan as long as you do report income. Even if you do not charge interest, IRS will impose the going rate. The IRS is not the ones taking the risk – you are. Just make sure the taxes are taken care of – you may need to escrow them but that may not be legal.

  2. Reply
    May 4, 2011 at 12:31 am

    The IRS imputes a certain minimum amount of interest. That means that you have to pay income tax on that amount of income, whether you’re actually collecting it or not (unless you’re a lending institution). Check the IRS site for imputed interest, and charge that amount (or be prepared to pay tax on income you’re not getting). A good tax attorney might be able to draw up a loan agreement for less than the imputed amount that the IRS would accept. (Considering that I just left a bank that dropped to 0.01% on savings accounts, the IRS may be imputing a lot less than 6%.)

    (What you consider a fair rate and what the IRS considers a fair rate may not be the same.)

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