Q: When a parent or grandparent helps out a young couple by giving them money for a down payment on a house, does this need to be noted with the Internal Revenue Service, either by the donors or the recipients? I expect that this money will be repaid when the house is sold in the future. - B.P.W.

A: What you're really asking is whether you have to notify the IRS that you are lend-ing your children or grandchildren money to buy a house. And the answer is: Yes, you do, in some way or another.If your loan is secured by a trust deed on the house, you must report any interest you receive on the loan as ordinary income. The borrowers are allowed to deduct the payments as mortgage interest on their tax return. If the loan isn't secured by a trust deed on the house, any interest payments you receive still must be reported as ordinary income. In this case, the borrowers would not be able to deduct the full interest payment on their taxes.

And even if you don't charge interest - or if you don't charge the rate set by the IRS as the minimum for loans between related parties - the IRS gets involved. In this case, the IRS deems you to have received the interest anyway - the service calls it "forgone interest" - and you may be required to pay taxes on it. Further, if the forgone interest exceeds $10,000 per year, it poses gift tax consequences.

For the sake of example, we'll say you lent your daughter and her husband $50,000 to make a down payment on a home, and you elected not to charge them the IRS-set minimum interest rate, which we'll peg here at a simple 8 percent. That's $4,000 in forgone interest to you each year.

According to Paul Hoffman of the Los Angeles law firm Hoffman, Sabban & Brucker, the IRS treats the $4,000 of forgone interest as taxable income to you. Further, it views the fact that you didn't charge the interest as a $4,000 gift from you to your daughter and her husband.

Whether you have to pay income taxes on the $4,000 is now the question. Hoffman explains that the IRS makes an exception for loans of less than $100,000 and exempts the lender from reporting the forgone interest as ordinary income. One reason for the exemption is that Congress did not want to penalize parents for lending money to their children for college or a home purchase. But there's a catch: If the borrowers have investment income - bank interest, stock dividends, for example - greater than $1,000 annually, then the lender must declare forgone interest in an amount equal to the borrower's investment income.