He Lent His Daughter the Down Payment at the Rate the IRS Publishes, Then Forgave $19,000 of It Every Christmas. Eleven Years Later the House Was Hers and the IRS Never Saw a Gift Tax Return

If you have adult children and a taxable account large enough to cover a down payment, there is a documented path to move that money into a home without ever filing a gift tax return. It is called an intrafamily loan at the applicable federal rate, paired with annual debt forgiveness kept at or under the yearly gift tax exclusion. Set up correctly, no Form 709 is required, and the transfer is entirely legal.

How the Mechanism Works

The strategy rests on two building blocks. First, the parent extends a genuine loan to the child at an interest rate that meets or exceeds the IRS applicable federal rate (AFR) for that loan’s duration. The AFR is the minimum rate the IRS publishes each month for loans between family members. Drop below it and Section 7872 of the tax code treats the difference as imputed interest, which can trigger gift and income tax complications neither side wants.

Second, once the loan is in place, the parent can choose to forgive a portion of the balance each year. That forgiven amount counts as a gift. As long as it stays at or under the annual exclusion per donor per recipient, no gift tax return is required. For 2026, the annual exclusion holds at $19,000, per IRS Revenue Procedure 2025-32. A married couple can each direct their own exclusion to the same person, and if the child is married, the son-in-law or daughter-in-law counts as a separate recipient. That combination allows up to four exclusions in a single year, sheltering as much as $76,000 of debt forgiveness without a Form 709.

The 11-Year Strategy in Action

Consider the father who helped his daughter buy a home through a private secured loan tied to the long-term AFR. Rather than handing over the full lump sum upfront, which would have eroded his lifetime exemption, he structured a real loan with a defined repayment schedule.

Every Christmas, he reviewed his finances and used his annual gift exclusion to cancel that year’s payment on the note. The amount started at $14,000 roughly a decade ago and climbed to $19,000 as inflation adjustments came through. Because each forgiven amount stayed at or below the annual limit, no Form 709 was ever filed. Eleven years later, the balance was gone.

Where the Rules Actually Live

The IRS publishes AFRs monthly in a revenue ruling and divides them into three term categories: short-term (three years or less), mid-term (over three years and up to nine years), and long-term (over nine years). A mortgage-style family loan spread over many years typically uses the mid-term or long-term AFR in effect during the month the loan closes. As of October 2026, those rates stand at 4.61% for mid-term loans and 5.22% for long-term loans, published in Rev. Rul. 2026-19. Both figures are well below prevailing conventional mortgage rates, which is one reason these arrangements continue to attract attention.

The annual gift exclusion is set under IRC Section 2503(b) and adjusted each year by revenue procedure. Because the exclusion is indexed for inflation, the $19,000 figure will shift during any plan running for more than a decade. Recalculate the math each year using the current published amount.

Who This Fits and Who It Does Not

The arrangement suits a parent with liquid savings who can genuinely part with the capital, a child who is purchasing a home, and a family willing to maintain documentation clean enough to hold up in an audit. Three situations undermine the plan: the parent needs the funds for retirement income, the record-keeping lapses, or the child is layering a conventional mortgage on top without disclosing the family debt. Mortgage underwriters ask about all liabilities, and an undisclosed family loan creates a serious problem at closing.

Setting It Up the Right Way

1. Have a CPA or estate attorney draft a written promissory note with a stated interest rate at or above the AFR for the applicable month and term.
2. Set a defined repayment schedule with actual monthly or annual payments.
3. Collect the payments. Report the interest received as taxable income on Schedule B. That is the cost of doing this correctly.
4. If security matters, record the note as a lien against the property. This also preserves the borrower’s mortgage interest deduction, which is generally available only on secured debt under IRC Section 163(h).
5. Each year, decide independently whether to forgive up to the exclusion amount, document the decision in writing, and avoid making any advance commitment to forgive.

Failure Mode to Take Seriously

The central trap is the step-transaction doctrine. If the arrangement reveals a prearranged plan to forgive the entire balance from day one, the IRS can treat the full transfer as a gift at the time of the loan rather than a series of annual exclusion gifts. That outcome blows past the exclusion and either pulls the transfer onto a gift tax return or counts it against the lifetime exemption. For 2026, the basic exclusion amount sits at $15,000,000 per individual, up from $13,990,000 in 2025, following enactment of the One Big Beautiful Bill Act. Notably, that higher exemption is now permanent, with no sunset provision, so the planning window is open indefinitely under current law.

The defenses against a step-transaction challenge are the operational facts: a written note, an AFR-compliant rate, real payments made and received, interest reported on Schedule B, and forgiveness decisions made year by year with no written or implied commitment to forgive the rest. The documentation is the entire defense. A full checklist of beneficiary forms, titling steps, and supporting paperwork is available in the free estate guide.

Editor’s note: This article was updated to include current October 2026 AFR benchmarks (4.61% mid-term, 5.22% long-term, per Rev. Rul. 2026-19) and to note that the One Big Beautiful Bill Act’s $15,000,000 per-individual exemption carries no sunset provision, making it permanent under current law.

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