The 30-second answer
Under IRC Section 7872(d)(1), an individual can make a below-market loan of up to $100,000 to a family member (or any individual) without being taxed on imputed interest — as long as the borrower's net investment income for the year is $1,000 or less. If the borrower's net investment income exceeds $1,000, imputed interest is capped at that amount. Because most working households have minimal investment income, the practical effect is that a parent can lend a child up to $100,000 at zero interest without the IRS treating the foregone interest as taxable income.
For a homeowner weighing a $50,000 HELOC at 8% APR versus a $50,000 zero-interest loan from a parent, the difference is roughly $4,000 a year in interest that stays in the family instead of going to a bank.
Why the loophole exists
IRC Section 7872 is the section of the tax code that governs "below-market loans." Normally, if you loan someone money at a below-market rate (including zero), the IRS will impute interest at the Applicable Federal Rate (AFR) and treat the foregone interest as if it were paid to you — meaning you owe income tax on interest you never actually collected. It's designed to prevent people from disguising taxable payments as loans.
But Congress carved out an exception for small intrafamily loans, recognizing that requiring families to charge market interest on modest loans would be intrusive and impractical. That exception is what people call the "$100,000 loophole."
The exact rule, in plain English
The $10,000 de minimis exception (7872(c)(2)): Any gift-loan of $10,000 or less between individuals is exempt from imputed-interest rules — provided the loan isn't used to buy income-producing assets.
The $100,000 exception (7872(d)(1)): For gift-loans of $100,000 or less between individuals:
- Imputed interest is capped at the borrower's net investment income for the year
- If the borrower's net investment income is $1,000 or less, imputed interest is treated as zero
- The lender doesn't have to report or pay tax on any imputed interest that falls within the cap
The critical variable is the borrower's net investment income — dividends, interest, capital gains, and similar. A borrower whose income is entirely W-2 wages typically has close to zero net investment income, which means the $100,000 loophole applies in full.
Family loan vs HELOC: side-by-side
| Feature | Family Loan (under $100K) | HELOC |
|---|---|---|
| Interest rate | Zero to a few percent (chosen by family) | ~8% APR variable (2026) |
| Collateral | None required | Your home |
| Maximum size | $100,000 (aggregated across all loans between the same two people) | Up to 80-85% CLTV, often $200K+ |
| Structure | Lump sum, one-time | Revolving credit line, draw as needed |
| Approval | Family decision | Credit + equity + income underwriting |
| Documentation | Written promissory note required | Full loan docs, recorded lien |
| Tax deductible? | No (no mortgage interest to deduct) | Only if used to buy, build, or substantially improve the home |
| Risk to borrower | Family relationship strain if default | Foreclosure risk on your home |
A worked example
Your daughter needs $60,000 for a kitchen remodel. She has $2,400 in dividend and savings-account interest for the year (her net investment income). You have the cash sitting in a taxable brokerage account. Two options:
Option A: You lend her $60,000 at zero interest. Because the loan is under $100,000 and her net investment income exceeds $1,000, imputed interest applies — but capped at her $2,400 net investment income. You'd report roughly $2,400 as interest income for the year (using the AFR calculation as the ceiling). She has no HELOC to worry about, no foreclosure risk, and no compounding balance eating into her budget.
Option B: She takes out a $60,000 HELOC at 8% APR. Interest-only during the draw period costs her $400/month, or $4,800/year. Over 10 years of draw period, that's $48,000 in interest — none of which she gets back. Her house is collateral.
Even after your $2,400 in reportable imputed interest income, the family is materially ahead with Option A.
Five requirements to keep the loan legit
1. Written promissory note. Includes principal, interest rate (or zero-rate election with reference to the $100,000 exception), repayment schedule, and default remedies. Both parties sign.
2. Actual repayments. The borrower makes real payments on the schedule specified. If no payments are ever made and no enforcement occurs, the IRS may recharacterize the loan as a gift, triggering gift-tax rules.
3. Loan is not disguised compensation. If the "borrower" is an employee or independent contractor of the "lender," the arrangement may be treated as wages or fees, not a loan.
4. Aggregation rule. The $100,000 ceiling applies to all outstanding loans between the same two people. If you've previously lent your daughter $60,000, you can only lend her another $40,000 under the exception until the first is repaid.
5. Applies to individuals, not entities. The exception is for loans between individuals. Loans from a family partnership, S-corp, or trust have different rules.
When to still choose a HELOC over a family loan
The amount exceeds $100,000. Above $100K, full AFR imputed-interest rules apply, and the tax simplicity of the exception disappears.
Family members don't have the cash. Obvious but important. Lending $100,000 in liquid cash is a much bigger ask than most families are set up for.
You need revolving access, not a lump sum. A HELOC lets you draw and repay repeatedly during the draw period. A family loan is one-and-done.
Family dynamics can't absorb it. Mixing family and formal lending is not for every family. If a payment dispute would fracture the relationship, the HELOC is worth the interest.
You want the tax deduction. HELOC interest is deductible when used to buy, build, or substantially improve the home securing the loan. Family loan interest is never mortgage-interest deductible.
How to decide
If you're looking at a $50,000-$100,000 borrowing need and there's a family member willing and able to lend, run the numbers both ways. The family loan almost always wins on cost. The HELOC almost always wins on flexibility, scale, and cleanness of the relationship.
The honest advice: talk to a CPA before finalizing an intrafamily loan of any size. The rules are simple in normal cases and messy in edge cases, and a few hundred dollars of professional advice up front is cheaper than fixing a mis-structured loan later.
If a HELOC is the right answer for your situation — because the amount is larger, or the flexibility matters, or the family loan just isn't in the cards — you can get a real HELOC quote from Audi Garner in about 60 seconds. Direct lender, licensed in 22 states, no hard credit pull for the initial quote.