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!

Answer:

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.

Tags: iska Loan ribbis

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