🧾 IRS Imputed Interest Rules (IRC §7872)
((FROM AI)) This is NOT tax advice, and I AM NOT a tax specialist! IRS Imputed Interest Rules (IRC §7872) If you structure a seller-financed note at 0% interest, the IRS will treat it as a below-market loan and apply imputed interest using the Applicable Federal Rate (AFR). This means: - The IRS assumes interest should have been charged. - You must report the difference between the AFR and your stated rate (in this case, 0%) as taxable income. - The buyer may also be treated as having paid that interest, which could affect their basis or deductions. 📊 AFR Snapshot (as of recent months) Loan Term AFR Type Typical Rate (2025) Short-term (< 3yrs) Short-term AFR ~4.12% Mid-term (3–9 yrs) Mid-term AFR ~4.45% Long-term (>9 yrs) Long-term AFR ~4.75% These rates are updated monthly by the IRS and reflect market conditions. 🧠Strategic Workarounds Given your compliance-first mindset, here are a few ways to structure creatively while staying IRS-safe: - Charge a nominal interest rate (e.g., 0.5%–1%) that’s still below market but avoids full imputation. - Use an interest-free note with a discounted purchase price, which may shift the tax treatment to capital gains rather than interest income. - Document the transaction clearly, including rationale for the rate and any business purpose (e.g., distressed sale, affordability). 🛠️ Copy-Ready Clause Example “Seller agrees to finance $X of the purchase price via a promissory note at 0% interest. Buyer acknowledges that IRS regulations may impute interest based on Applicable Federal Rates, and agrees to indemnify Seller for any resulting tax liability.”