How do I protect myself from taxes with a mortgage loan to my children?

My daughter and son-in-law and two small children moved to the US from Italy and have been living with my husband and me for the past 7 months. They want to buy a house, have $ 75,000 in cash to put down and I recently took out a second mortgage (fixed 15 year 6% home equity loan) for $ 160,000 to loan to them interest free so they can buy a house with cash for $ 235,000. But my husband and others are telling me it may get complicated with the IRS, etc.

We planned to have papers drawn up, like a promissory note, saying that they would make the monthly payments on the $ 160,000 loan that is under my name. And if they should die or move before the loan is paid off, the money from the sale of the house would go to pay off the $ 160,000 loan. Do I need to charge interest for them? They are actually going to be paying off the loan that is under my name and already has 6% interest being paid. Is the fact that it is over $ 100,000 going to be a problem with the IRS and interest-free loan’s to family? It’s not a gift because they are paying it off.

It’s all very confusing and I don’t want to get stuck with a big gift tax or imaginary interest tax or worse yet, get in trouble. Do I need a lawyer or can we just get a Quicken Lawyer software Promissory note and be okay? I trust my daughter and son-in-law to pay this loan that’s in my name. It’s just been hard for them to get a loan right now because of the requirements for 2 years residency, 2 years at one job and 2 years credit in US. Price of houses are down and I want them to be able to buy one now.

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