Updated August 3, 2026. Quick answer: the test is not what you called it. It is whether there was a genuine, legally enforceable obligation to repay a sum certain. Both a loan and a gift are perfectly fine; the trouble comes from a transfer that was described as one and behaved like the other.
The regulation’s own definition
“A bona fide debt is a debt which arises from a debtor-creditor relationship based upon a valid and enforceable obligation to pay a fixed or determinable sum of money”
And the other half of it: “A gift or contribution to capital shall not be considered a debt for purposes of section 166.”
Treas. Reg. 1.166-1(c). That regulation is written for the bad-debt deduction, but it is where the IRS states what it means by a bona fide debt.
What we are not going to give you
The familiar checklist – promissory note, stated maturity, repayment schedule, collateral, actual repayment history, the lender demanding payment, the borrower’s ability to repay – could NOT be traced to any IRS-published revenue ruling or regulation within the primary-source set. It derives from Tax Court and appellate case law. The agent flagged this rather than reproducing the list as if the IRS published it.
You will find that checklist on a great many pages, presented as though the IRS published it. We could not find that it did. The factors are real and they come from decided cases — but the honest framing is that they are evidence of the statutory test, not a rule of their own.
So what actually makes it a loan
Everything that makes the obligation genuine, enforceable and provable:
- A signed note stating principal, rate and when repayment is due. Without a sum certain and a term, there is nothing to enforce.
- Interest at or above the applicable federal rate, or a clear-eyed decision to accept the below-market treatment. The rate.
- Payments that actually happen, on the schedule, in a traceable form. A note nobody ever pays looks exactly like a gift with paperwork.
- Records kept by both sides.
- A borrower who could plausibly repay. Lending a sum the borrower could never service is hard to characterise as debt.
If it is treated as a gift instead
If a purported loan is recharacterised as a gift: no bad-debt deduction is available if the borrower never repays, and the transfer is a completed gift against the annual exclusion and, above it, the lifetime exemption.
For most families that is a paperwork consequence rather than a tax bill — the annual exclusion is $19,000 per recipient for 2026, and amounts above it consume lifetime exemption rather than producing tax. How the exclusion works and what sits behind it.
The honest version of this decision
Deciding to make a gift is not a lesser option, and dressing a gift as a loan to preserve appearances inside a family creates the worst of both: no real expectation of repayment, and a document that turns up in an estate years later with a balance on it.
What that looks like when it does.
The document is what makes it enforceable
The regulation’s test is a valid and enforceable obligation to pay a fixed sum. A signed promissory note with principal, rate and schedule is how that gets proved — and it protects the borrower as much as the lender, because it fixes what is owed. LawDepot builds a state-specific promissory note.
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General information drawn from IRS, Medicare, HUD and state statute and regulation, not legal, tax or financial advice. Continuing-care law is state law and differs materially between states; every figure here is year-labelled and every source named. Powers of attorney, guardianship and trusts are governed by STATE law and differ change, and interest rates published by the IRS change every month – never rely on a rate quoted on any page, including this one. We are not a law firm or a tax adviser, and this is not legal or tax advice.