Business 3 min read By Arthur Ellington
Father avoids gift tax by forgiving daughter's mortgage payments at IRS rate
A US father structured a loan to his daughter for a house down payment at the IRS-approved interest rate, then forgave $19,000 of the debt each Christmas, transferring the home to her over eleven years without filing a gift tax return.
A US property owner has used a decade-long loan forgiveness strategy to transfer a house to his daughter without triggering federal gift tax, a technique that relies on the annual gift tax exclusion and the IRS's own published interest rates.
The father lent his daughter the money for a down payment on a home, charging interest at the rate the IRS publishes for such loans. Each Christmas, he forgave $19,000 of the outstanding balance, an amount that stayed within the annual gift tax exclusion limit for most of the period. After eleven years of these annual forgiveness payments, the loan was fully repaid and the house belonged to his daughter, with no gift tax return ever filed.
The strategy works because the IRS allows individuals to give up to a certain amount each year without reporting it as a taxable gift. By keeping each year's forgiveness below that threshold, the father avoided the paperwork and tax liability that would have come with a larger one-time transfer. The use of the IRS-published interest rate, known as the applicable federal rate, ensured the loan was treated as a legitimate loan rather than a disguised gift from the outset.
Estate planning professionals note that this approach requires discipline and a long-term view. The lender must be willing to forgive the same amount each year, and the borrower must be able to manage the remaining payments. The strategy also depends on the annual exclusion remaining stable; if the forgiven amount had exceeded the exclusion in any single year, the father would have been required to file a gift tax return and potentially pay tax on the excess.
The case illustrates a practical application of tax rules that are often overlooked by families transferring property. Rather than making a single large gift or selling the home at a discount, the father used a structured loan with annual forgiveness to achieve the same result while staying within legal limits. The IRS has not challenged the arrangement, and the daughter now owns the home free of any outstanding debt.
Financial advisers point out that this technique is most effective when the annual exclusion amount is higher than the annual forgiveness. In years when the exclusion was lower, the father would have needed to adjust the forgiven amount to stay within the limit. The strategy also requires careful record-keeping, as both the loan and the forgiveness must be documented to satisfy tax authorities if questioned.
The outcome is a reminder that tax-efficient wealth transfer does not always require complex trusts or corporate structures. A simple loan agreement, combined with consistent annual gifts, can move significant assets between generations while minimising tax exposure.
