🧾 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.”

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