Is Money from a Foreign Relative a Gift or a Loan for U.S. Tax Purposes?
The IRS classifies money received from a foreign relative as either a gift or a loan based on the transfer’s intent and terms. A gift triggers Form 3520 reporting if it exceeds $100,000 from a nonresident alien individual in a year. A loan creates no Form 3520 obligation but may trigger imputed interest rules if the terms are below-market.
How the IRS decides gift vs. loan:
| Factor | Points toward a gift | Points toward a loan |
| Written agreement | None | Signed a promissory note with terms |
| Repayment schedule | No expectation of repayment | Fixed installments or maturity date |
| Interest rate | No interest charged | At or above IRS AFR |
| Actual repayments | None made | Documented payments over time |
| Collateral or security | None | Pledged assets |
Why the classification matters:
- Gift over $100,000: You must file Form 3520 (Part IV) with your return. The gift itself is not taxable, but the penalty for not filing is 5% per month up to 25% of the amount
- Loan with below-market interest: The IRS imputes interest at the Applicable Federal Rate (AFR). The difference between the AFR and the rate charged is treated as a gift from the lender to you, and as interest income to the lender
- Loan recharacterized as a gift: If the IRS determines there was never a real expectation of repayment, the entire amount becomes a reportable foreign gift
Protecting yourself:
- Document every transfer with a written agreement in both languages
- Use a market interest rate (at least the AFR for the loan term)
- Make actual repayments and keep wire transfer records
- Report on Form 3520 if there is any doubt; over-reporting is safer than under-reporting
For foreign gift reporting guidance, see our Form 3520 Guide.
Last updated on April 29, 2026
