06-reference/research

florida intra family purchase money note

2026-08-25·research-brief·source: deep-research·by Ray Data Co (deep-research synthesis)·! high

The Note Does Not Avoid the Cash Outlay — It Converts It Into a 30-Year Illiquid Receivable, and Recording Is What Buys Both the Tax Result and the Enforcement Right

Not legal or tax advice. This is research to make the founder a better client of a Florida real-estate attorney and a CPA, not a substitute for either. Every structural item below is tagged (S) statutory/regulatory and read at source, (P) common practitioner practice, or (U) unverified within this brief's caps.

The question

Verbatim: "What does a Florida-recorded intra-family purchase-money note require to be respected as bona fide debt rather than a disguised gift, and at what applicable federal rate?"

Context: this is open follow-up #2 from [[2026-08-19-asset-depletion-mortgage-qualification]] — the branch of the co-sign-vs-gift fork that nobody has priced. The backlog note frames it as "the one structure that avoids BOTH the DTI hit of co-signing and the outright cash outlay of a gift." Half of that framing is wrong, and correcting it is the most useful thing in this brief.

What we already know (from the vault)

What the web says

The rate, read at source. Rev. Rul. 2026-13 prescribes the AFRs for August 2026. Table 1 (§1274(d)), annual compounding: short-term 4.10%, mid-term 4.35%, long-term 4.92%. Semiannual/quarterly/monthly step down slightly (long-term: 4.86% / 4.83% / 4.81%). The §7520 rate is 5.20%. (S) — read directly from the IRS release, not a secondary summary.

A live trap in that lookup. A secondary aggregator reported the August 2026 "long-term AFR" as 3.72%. That is the Table 2 adjusted AFR under §1288(b), a tax-exempt-obligation figure, not the Table 1 rate that §7872 keys to. Using it would understate the required rate by 120bps and put the note below market. Always pull Table 1 from the Rev. Rul. itself. (S)

The tier that applies is set by the note's term, and the rate locks at execution. Short-term = term of 3 years or less; mid-term = over 3 but not over 9; long-term = over 9 years (P/U — the tier boundaries are §1274(d) and are uncontroversial, but I did not read the statutory text within cap). For a term loan, the below-market test under §7872 is applied once, when the loan is made; a note that carries the AFR in effect that month is not a below-market loan for its life, regardless of where rates go later. A demand loan is retested continuously against the blended/short-term rate — which is precisely why a demand note is the wrong instrument here. (P) A 30-year purchase-money note is a long-term term loan: 4.92% if executed in August 2026, and a different number the month it actually gets signed. Re-pull at execution.

§7872 mechanics if you undershoot. A below-market gift loan is recharacterized into two deemed transfers on the last day of each calendar year: forgone interest is treated as gifted from lender to borrower, then paid back as interest income to the lender. The lender pays tax on interest never received, and the gift side consumes annual exclusion / lifetime exemption. Four covered categories: gift, employer-employee, corporation-shareholder, and tax-avoidance arrangements. (S, via §7872 and practitioner sources) The $10,000 gift-loan de minimis exception and the $100,000 exception (which caps imputed interest at the borrower's net investment income, and at zero if that income is ≤$1,000) both exist (U — not verified at statutory text within cap) and both are irrelevant at $450-600k. There is no small-loan escape hatch at this size.

Bona fide debt: the presumption runs against you. Transfers within a family group get special scrutiny, with a presumption that the transfer is a taxable gift — Harwood v. Commissioner, 82 T.C. 239 (1984). The presumption is rebutted only by an affirmative showing that at the time of the loan the lender had a real expectation of repayment and an intention to enforce the debt — Lockett v. Commissioner, T.C. Memo 2012-123. Federal courts apply a multi-factor test (commonly described as nine factors); the leading recent case is Estate of Bolles v. Commissioner, T.C. Memo 2020-71, aff'd (9th Cir. 2024), where advances to a child were held to be gifts because the mother knew repayment was not realistically coming. (S — cases named at source; the nine-factor enumeration itself is (P).) The factors practitioners consistently list: a written note; stated interest at or above AFR; a fixed maturity date; a fixed repayment schedule; security for the debt; whether payments were actually made and demanded when late; the borrower's objective ability to repay; whether the parties recorded the debt on their books/returns; and whether the lender ever moved to enforce.

Florida's two recording taxes are separate levies and both hit at the clerk's window. Under Fla. Stat. §201.08, documentary stamp tax is $0.35 per $100 or fraction of the obligation — subsection (1)(a) on promissory notes and written obligations to pay money, with a cap that "may not exceed $2,450"; subsection (1)(b) on mortgages, trust deeds, and security agreements filed or recorded in this state, where the cap does not apply. Where tax was already paid on the note, the mortgage tax is due only on the excess over "the aggregate amount upon which tax was previously paid" — no double taxation. (S — read at the statute.) Separately, Fla. Stat. §199.133 imposes the nonrecurring intangible personal property tax at 2 mills ($0.002 per $1) on obligations secured by a mortgage on Florida real property. (S)

Convergences and contradictions

Synthesis for RDCO

The rate question is a lookup and should be treated as one; the structuring question is where the decision actually lives. As of Rev. Rul. 2026-13, a 30-year note prices at 4.92% annual. That number will be wrong by execution. The durable instruction is: pull Table 1 from the Rev. Rul. for the month of execution, pick the tier by note term, and never take an AFR from an aggregator — the 3.72% adjusted-AFR trap above is exactly the failure mode. Charge at or above AFR and §7872 simply does not apply; there is no forgone interest, no deemed gift, and no imputed income. Undershoot by any amount and the founder pays tax on interest he never received, every year, for thirty years.

The bona-fide-debt checklist is short, mechanical, and cheap — which means there is no excuse for failing it. Written note with a fixed maturity and a real amortization schedule. Stated rate ≥ AFR for the month of execution. A recorded purchase-money mortgage in the county's official records securing the note against the property. Actual monthly payments moving by traceable bank transfer, not cash and not "we'll settle up." Interest reported by the founder on Schedule B and, if it matters, by the parents as qualified residence interest. And — the factor families reliably fail — a demonstrated willingness to demand payment when one is missed. Bolles lost on precisely this: the transferor never expected repayment, so the paperwork didn't save it. A parallel side agreement to forgive payments annually up to the gift-tax exclusion is the single fastest way to convert the whole thing back into a gift (P); if forgiveness happens at all it must be genuinely unplanned and documented after the fact.

But the honest recommendation is that the note is a good structure attached to a bad cash-flow moment. Run the three branches on the axis that binds. Gift $150k: $150k gone, $150k of lifetime exemption consumed, parents still need to qualify for $450k on retirement income — which [[2026-08-19-asset-depletion-mortgage-qualification]] found they probably cannot without a much larger check. Co-sign: near-zero cash today, but it eats an estimated $400-600k of the founder's own 2027 borrowing capacity six weeks before his construction loan closes. Full purchase-money note: the parents' qualification problem disappears entirely — there is no lender, no underwriter, no asset-depletion divisor, no B3-3.4-06, no H4P — the founder's DTI is untouched, zero lifetime exemption is consumed, and the money comes back. It comes back at $2,394/month for 360 months on $450k, returning $411,748 of taxable interest over the life. It also means $450k-$600k is unavailable during a build the vault already models at $50-100k of margin. That is the trade, stated plainly: the note is the cheapest option in tax and DTI and the most expensive option in liquidity.

Two things follow for the decision, not the research. First, this is a hybrid instrument in practice, not a binary: gift the $150k that was always going to be a gift, and hold a recorded second for the balance the parents cannot finance — which preserves some liquidity while still killing the co-sign. Second, and more consequentially, the note is the option that most benefits from sequencing: a family note written after the construction loan closes carries none of the liquidity conflict, because the build's draws are already committed. The parent brief's finding was that the closing sequence is what breaks the co-sign path. The same is true here in mirror image — the sequence is what breaks the note path, and the sequence is the one variable [[milestones]] can actually change. The interest income is also not the free win the parent brief implied: at a top marginal rate plus NIIT, ~$22,140 of first-year interest on $450k is closer to ~$14k after tax, i.e. a real return near 3.1%, which is the number to compare against whatever the capital would otherwise be doing.

Why this is in the vault

This closes open follow-up #2 of [[2026-08-19-asset-depletion-mortgage-qualification]] and supplies the missing fourth branch of Critical Open Question #1 in [[readme]] — the Q1 2027 decision gate in [[milestones]] currently offers only "parents pre-approve on retirement income" or "founder co-signs," and this brief establishes that a recorded purchase-money note is a third pass condition with a completely different cost profile (zero DTI, zero exemption, maximum liquidity drag). It also corrects the backlog's premise that the note avoids the cash outlay, which would have mis-set the founder's expectations going into the parent conversation.

Open follow-ups

  1. Does a recorded intra-family second mortgage's monthly payment count against the parents' DTI at a first-mortgage lender, and will an institutional first lender even permit subordinate family financing at purchase? The hybrid structure in the synthesis (gift $150k + hold a recorded second) only works if the second is either excludable or the parents can carry both payments. Agency subordinate-financing rules and portfolio overlays likely differ.
  2. Can the note be structured with deferred or interest-only payments that accrue at AFR and balloon at sale or death without failing the bona-fide-debt test? This would collapse the liquidity conflict on the parents' side but pushes hard against the "actual payments made and demanded" factor that decided Bolles.
  3. Does Fla. Const. art. X, §4(a)'s purchase-money exception to homestead forced-sale protection apply to a mortgage held by a family member rather than a commercial lender, and are two subscribing witnesses required for the mortgage under §689.01? Both were flagged (U) here and both are execution-blocking if wrong.
  4. What is the founder's actual after-tax hurdle rate for capital in the 2027 window, and does a ~3.1% after-tax return on a 30-year illiquid receivable clear it? The brief asserts this is the deciding comparison but does not have the founder's alternative-use number.
  5. Would writing the note after the construction loan closes (rather than before the parents' purchase) work at all, given the parents need the money at their closing? Sequencing is named as the fix but the mechanics — bridge, delayed-financing reimbursement, or simply moving the parents' closing — are unexamined.

Related

Sources

Vault

Web / primary

Caps used: QMD 2 of 5 · WebSearch 3 of 3 · WebFetch 3 of 3 (the Rev. Rul. PDF failed to parse through WebFetch; Table 1 was extracted locally with pdftotext from the saved file, so the rates above are read from the IRS document itself).