Short answer: a gift and a family loan are not two flavors of the same thing. A properly documented gift can be used for a down payment and does not count against the borrower’s debt ratios. A loan from a parent generally cannot be used as down payment funds at all, and if it exists it has to be disclosed and counted. The tax treatment runs the opposite direction, which is why this decision belongs on a CPA’s desk before it lands on mine.
Who this is for
This one is written for the CPAs, enrolled agents and financial planners I work with in San Diego whose clients are quietly funding their kids’ first purchase. It comes up every fall, and it came up twice last week. The parents have the money. They want to help. Nobody has asked whether the help should be structured as a gift or a note, and by the time it reaches me the money has usually already moved.
That is the expensive part. Once the funds are in the buyer’s account with no paper behind them, the options narrow fast.
The timing question your clients are actually asking right now
Freddie Mac’s Primary Mortgage Market Survey put the 30-year fixed national average at 6.95% on September 17, 2026 — up from 6.76% the week before, and up from 6.26% a year ago. That is a 19-basis-point move in a single week.
Meanwhile, the IRS published the September 2026 applicable federal rates in Revenue Ruling 2026-17. The long-term AFR is 5.12% with annual compounding. Mid-term is 4.49%. Short-term is 4.18%.
So a parent can lend at 5.12% on a 30-year note without creating a below-market loan problem, while the market average sits at 6.95%. That spread is the reason the question is being asked in September 2026 and was not being asked as loudly in 2021. I am not going to tell you the spread makes a family loan correct — it frequently does not, for reasons below — but it does explain why the phone is ringing.
The lender side: what a gift has to look like
On a conventional loan, gift funds from an acceptable donor can cover the entire down payment on a primary residence. The donor is generally limited to a relative, a fiance, or a domestic partner. What underwriting needs is unglamorous and specific:
- A signed gift letter naming the donor, the relationship, the dollar amount, the property address, and — the clause people forget — an explicit statement that no repayment is expected.
- Evidence the donor actually had the money. A statement showing the funds leaving the donor’s account.
- Evidence the money arrived. A deposit into the borrower’s account, or a wire directly to escrow.
- A clean audit trail between the two. Cash deposits, third-party transfers and round-number Venmo activity create sourcing problems that take days to unwind.
The sentence that kills deals is “we’ll just call it a loan and they’ll pay us back when they can.” If repayment is expected, it is not a gift, and signing a gift letter that says otherwise is a misrepresentation on a federally related transaction. I will not paper around that, and neither should you.
The tax side: what a loan has to look like
If the family genuinely wants a loan, Internal Revenue Code §7872 is the governing section. A loan carrying interest below the applicable federal rate is a below-market loan, and the foregone interest gets recharacterized — imputed to the lender as interest income and treated as a gift back to the borrower.
Two statutory exceptions matter for the conversations you are having:
- A de minimis exception for aggregate loans between individuals at or under $10,000, where tax avoidance is not a principal purpose. A down payment loan almost never fits this.
- A $100,000 exception, under which imputed interest on gift loans aggregating $100,000 or less is limited to the borrower’s net investment income for the year — and is zero if that net investment income is $1,000 or less.
The mechanics your clients skip: a real note, a stated rate at or above the AFR for the loan’s term, a payment schedule, and — if the parents want any chance at deducting nothing and the child any chance at deducting interest — recording the note against the property. An unrecorded, unsecured family note produces no mortgage interest deduction for the borrower under §163(h), because qualified residence interest has to be secured by the residence.
And the AFR is set by the month the loan is made. A note papered in September 2026 uses September’s table. This is one of the few areas where waiting three weeks changes the answer.
Side by side
| Documented gift | Family loan | |
|---|---|---|
| Usable as down payment | Yes, with a gift letter and sourcing | No — borrowed funds are not down payment |
| Effect on debt ratios | None | Payment counts against the borrower |
| Gift tax reporting | Form 709 if over the annual exclusion | None on principal; imputed interest possible |
| Interest rate floor | N/A | AFR for the term — 5.12% long-term, September 2026 |
| Borrower interest deduction | N/A | Only if the note is secured by the residence |
| Reduces lifetime exemption | Yes, amounts above the annual exclusion | No, unless forgiven |
| Who owns the risk | Donor, permanently | Donor, until repaid or forgiven |
The 2026 numbers your clients will ask you for
For 2026 the annual gift tax exclusion is $19,000 per recipient. A married couple splitting gifts can move $38,000 to one child, or $76,000 to a child and a spouse, without touching the lifetime exemption. The federal estate and gift exemption sits at $15 million per individual for 2026.
Which means for most San Diego down payments, the gift tax conversation is a reporting conversation, not a tax conversation. A $150,000 gift to a married couple from two parents uses $76,000 of annual exclusions and files a Form 709 for the balance against a $15 million exemption. The client hears “gift tax” and panics. You get to tell them the number is almost always zero. That is a good phone call to be on.
When each one is the wrong answer
I would rather name the option I am telling someone not to take than pretend both are fine.
Skip the loan when the parents need the money back on a schedule. A note against a home the child may keep for twenty years is not a liquidity plan, and the payment lands on the child’s debt-to-income ratio at exactly the moment they are trying to qualify.
Skip the loan when the buyer is stretching. The AFR spread looks attractive right up until the note pushes the ratios past what will underwrite.
Skip the gift when the parents have blended-family or estate-equalization concerns, or when the money is genuinely meant to come back. A forgiven note documented as a note is a cleaner record than an informal gift everyone remembers differently in nine years.
Skip both when the real problem is that the payment does not work. Money arriving at closing does not fix a monthly number that never penciled.
The structure that usually wins
The version I see work most often is not a pure gift or a pure loan. It is a gift for the down payment — clean, letter-documented, closed — with the family separately using annual exclusions in later years if they want to help further. Two instruments, two purposes, neither one contaminating the other.
Where a note genuinely fits, it gets papered properly and recorded, priced at the AFR in force that month, with the parents comfortable that they may end up forgiving it in annual-exclusion-sized bites. That is a plan. “We’ll figure it out” is not.
Frequently asked questions
Can a family loan be used for the down payment if it is secured by something else?
A loan secured by an asset the borrower already owns is a different analysis than an unsecured family note, and some secured borrowing can be acceptable. It is fact-specific and it needs to be disclosed up front, not discovered in underwriting. Bring it to me before the funds move.
Does the donor have to be out of the transaction entirely?
An acceptable donor generally cannot be a party with an interest in the sale — the builder, the seller, the agent. A parent who is also the listing agent is a conversation, not an automatic no, but it is a conversation to have early.
What if the parents already wired the money three months ago?
Seasoning helps, but it does not erase the question of whether repayment is expected. If it is a gift, it can still be documented as one. If it is a loan, it needs to be disclosed as one.
Is any of this tax advice?
No. I am a mortgage professional, not a CPA or an attorney. Everything above is general education about how lenders and the Internal Revenue Code treat these two structures differently. The return is yours to sign.
Let’s get the structure right before the money moves
If you have a client weighing this, the cheapest hour any of us will spend is the one before the wire goes out. I am happy to be the second voice on the call — I will tell your client plainly what underwriting will and will not accept, and leave every tax question where it belongs, with you.
Book a partnership call and we will build the referral loop so these land on both our desks early instead of late. If a client is ready to get their financing reviewed, they can start a mortgage review here.
Related reading: the complete 2026 guide to buying a house in San Diego, how much of a down payment you actually need in San Diego, and step-up in basis on inherited San Diego property for the other side of the family-money conversation.
Ron Berg is a mortgage professional with The Berg Group, powered by C2 Financial Corporation, serving San Diego and California. He works with CPAs, financial planners and real estate professionals on shared-client financing strategy. Connect on Instagram or book a partnership call.
Ron Berg, NMLS #974839. C2 Financial Corporation, NMLS #135622. Equal Housing Opportunity. Rates referenced are cited national averages from Freddie Mac’s Primary Mortgage Market Survey and are not an offer, quote, commitment, or guarantee of any specific rate, program, or approval. This article is general education, not tax, legal, or investment advice — consult your CPA and attorney regarding your own situation. Source: Freddie Mac PMMS, September 17, 2026; IRS Revenue Ruling 2026-17 (September 2026 applicable federal rates); IRS 2026 inflation adjustments.
Leave a Reply