I would like to receive a family loan to purchase a house. In essence it can either be structured as long term, non-interest baring loan, or as an iska. The lender would like to avoid a gift tax. In order to not be recorded as a gift, according to the IRS, the loan must be an interest baring loan, and registered as a mortgage. Please advise: can one sign a document that speaks of the whole iska as a regular loan, purely for tax purposes (while having a heter iska as their actual agreement)? Further, even if one doesn’t sign a separate agreement for tax purposes, how does the IRS view a heter iska – if they see it as a loan, did this having any baring on the validity of the heter? Lastly, what is the preferred approach in the above mentioned case? Thanks!
The IRS view of the loan as such and not an iska will not effect the validity of the heter iska. A heter iska would be permissible, the other option you suggest is a “non interest baring” loan. If the intent an actual interest free loan, this would be preferable over paying ribbis with a heter iska.