What an Intra-Family Mortgage Is

An intra-family mortgage is a documented loan from one family member (typically parents or grandparents) to another (typically adult children or grandchildren) used to finance a home purchase or refinance. The economic substance mirrors a bank mortgage: a written promissory note, a fixed or scheduled payment, an interest rate at least equal to the AFR, and a recorded mortgage or deed of trust securing the loan against the property.

The difference from a bank mortgage is who holds the note. The interest payments go to the family, the lien sits with the family, and the deal is privately negotiated between the parties (with the IRS guardrails in place).

Why Families Use This

• -Rate arbitrage. The AFR is generally lower than market mortgage rates. The child pays less interest than they would to a bank.
• -Interest stays in the family. The interest the child would have paid to a bank becomes taxable income to the parent instead. Net family wealth is preserved.
• -Yield on parental cash. Parents holding low-yielding cash or bonds can deploy that capital at the AFR, often higher than what they were earning, with a recorded lien as collateral.
• -Estate planning. Combined with annual gift exclusion forgiveness, the structure can transfer wealth to the next generation in measured steps without burning lifetime exemption.

The IRS Applicable Federal Rate (AFR)

The Applicable Federal Rate is the minimum interest rate the IRS allows on private loans. It is published monthly by the IRS in three tiers:

• Short-term: loans of 3 years or less.
• Mid-term: loans of more than 3 years and up to 9 years.
• Long-term: loans of more than 9 years.

A 30-year amortizing mortgage uses the long-term AFR for the month the loan is made. You can lock in the AFR rate at origination for the life of the loan; subsequent monthly publications do not change a loan already on the books.

Charge at least the AFR. If the loan rate is below the AFR, the IRS imputes interest at the AFR and taxes the lender as if they had charged that amount, plus treats the unpaid difference as a gift to the borrower (which may eat into annual exclusion or lifetime exemption).

Structure That Works for Both Sides

• -Promissory note. Drafted by an attorney, signed by both parties. Specifies the amount, rate, term, payment schedule, prepayment terms, and default provisions.
• -Recorded mortgage or deed of trust. Filed with the county recorder where the property sits. This creates a legal lien (just like a bank mortgage), makes the loan enforceable, and is required for the borrower to deduct mortgage interest.
• -Title insurance. Not required, but many families pay for a lender's title policy to protect the family member's loan against title defects.
• -Servicing. Some families hire a loan servicer to collect payments, send statements, and issue the year-end interest summary. This keeps the arrangement professional and creates a clean paper trail.

Mortgage Interest Deduction for the Child

For the borrower to deduct interest as "qualified residence interest" on Schedule A, the loan must meet IRS requirements:

• The loan must be secured by the home through a recorded mortgage or deed of trust.
• The home must be the taxpayer's primary residence or a qualified second home.
• The taxpayer must itemize deductions (vs taking the standard deduction).
• The loan is subject to the post-2017 acquisition indebtedness cap ($750,000 for most taxpayers).

Without proper recordation, the IRS may disallow the interest deduction even if every other element looks like a real mortgage. Recording is cheap relative to the deduction it preserves.

Tax Reporting

• -Lender (parent). Reports interest received as taxable interest income on Schedule B of the Form 1040.
• -Borrower (child). Deducts interest paid on Schedule A, subject to itemization and the acquisition indebtedness cap.
• -Form 1098. The parent should issue a paper Form 1098 to the child each year showing interest paid. The IRS does not require non-bank lenders to file with the IRS, but the child needs the summary for their tax return and the family should keep matching records.
• -Recordkeeping. Keep contemporaneous records of every payment. Bank transfers create an auditable trail; cash payments do not.

Estate Planning Angles

• -Annual exclusion forgiveness. Each parent can gift up to $19,000 per child per year (2026 figure) without using lifetime exemption. Two parents jointly can forgive $38,000 per year of principal off the loan, effectively transferring wealth in measured steps.
• -Removing future appreciation. The loan principal sits in the parent's estate, but the child's home appreciates outside the parent's estate. Over decades, this can move significant appreciation out of the estate for transfer tax purposes.
• -Family income shifting. Subject to kiddie tax and other anti-abuse rules. Most useful when the child is an adult in a higher bracket than the parent's retirement-stage income.
• -Coordinating with a trust. The loan can be held by a revocable or irrevocable trust as part of a broader estate plan. Trust-held loans add complexity but can be the cleanest path for larger estates.

Not estate planning advice. The interaction between intra-family loans, annual exclusion gifts, lifetime exemption, kiddie tax, and state estate tax is genuinely complicated. Use an estate attorney.

Pitfalls to Avoid

• !Rate below the AFR. Triggers imputed interest. The IRS taxes the lender at the AFR anyway, and the discount counts as a gift.
• !No recorded mortgage. Loses the child's interest deduction and removes the family member's lien position.
• !Loose documentation. A handwritten IOU and informal payments can be reclassified as a gift, opening up gift tax issues retroactively.
• !No payment history. If the child never actually pays, the IRS can argue it was never a loan. Even forgiveness should follow a regular pattern with annual documentation.
• !Family disputes. Divorce, sibling friction, or financial setbacks can turn a friendly loan into a legal battle. Address this in the documentation up front.

When This Is the Right Move

• Parents have significant assets earning yields below the AFR (cash, money market, short bonds).
• The child is creditworthy and able to pay (this is not a credit rescue strategy).
• Family dynamics are healthy enough to handle the financial entanglement.
• There is a broader estate or wealth-transfer plan, not just the mortgage in isolation.
• Both sides are willing to treat the loan like a real mortgage, with documentation and consistency.

When This Is the Wrong Move

• Parents will need the cash for their own retirement or care costs.
• The child has unstable income, poor credit, or a history of missed payments.
• Family dynamics are fragile or there are existing financial resentments.
• The deal is being used to dodge underwriting on a property the child cannot afford.
• The parents are not willing to enforce the note if the child defaults.

Hybrid Strategies

• -Down payment gift + traditional mortgage. Parents gift the down payment, child gets a standard bank mortgage for the balance. Simplest structure. See our gift funds page for documentation.
• -Family loan + traditional mortgage. Parents lend a portion (often the down payment or a second lien), the child finances the rest with a bank. The bank will treat the family loan as debt for DTI purposes, which can affect qualifying.
• -Co-signer or co-borrower. Parent goes on the loan with the child rather than lending privately. See parent co-signer mortgage for the tradeoffs.
• -Family Opportunity Mortgage. When the family member is an elderly parent or disabled adult child who cannot qualify alone, the Family Opportunity program is often a cleaner path than a private family loan.