Definition
The IRS's published monthly interest rate used to determine whether loans (particularly family loans) are below-market and qualify for imputed interest or other tax consequences.
Not sure where this fits?
Answer a few questions and we’ll open the path that fits, at the right step.
Find my pathAbout this term
The Applicable Federal Rate (AFR) is published monthly by the IRS based on federal borrowing rates. It varies by loan term (short-term, mid-term, long-term). Loans charging less than AFR are considered below-market and trigger imputed interest. Loans charging AFR or more avoid imputed interest complications. AFR appears on the IRS website and in IRS publications, published by month and term. Different rates apply to different loan purposes (gift loans, sales, corporate loans), and rates vary by loan term. For seller-financed real estate, using AFR prevents tax complications. Tax professionals check AFR when structuring related-party transactions. AFR changes monthly, so transactions in different months might have different rates. Understanding AFR helps in planning family loans, seller financing, and related-party transactions.
Pro Tip
Before making related-party loans, check the IRS website for the current AFR. Using AFR or higher protects you from imputed interest complications.
Example
The AFR in January 2024 is 5.33% for mid-term loans. A seller-financed property should charge at least 5.33% to avoid imputed interest complications.