The definition of the Applicable Federal Rate (AFR)
The term Applicable Federal Rate (AFR) refers to the minimum interest rate required by the Internal Revenue Service (IRS) for private loans or loans between family members.
The definition of the Applicable Federal Rate (AFR)
The IRS publishes a set of AFR rates in section 1274 (d) of the Internal Revenue Code every month. These rates are based on data derived from market yields on commercial debt, such as U.S. Treasury bonds. Affected parties will face tax consequences if the interest rate on the private loan is lower than the relevant AFR.
Private loans vs. gifts
The IRS considers it a gift if no interest is charged on the private loan. You will need to file IRS Form 709, the Gift Tax Return, for any year in which you give money or assets exceeding the annual exclusion amount. The exclusion is $15,000 in 2021, increased to $16,000 in 2022.
Tips for lending to family members
Some tips can help you proceed wisely if you decide to lend money to a family member.
Key Takeaway
The AFR is the minimum interest rate allowed by the IRS for private loans. The three types of AFR are short-term, mid-term, and long-term. The IRS publishes AFR rates every month. You can charge less than the AFR when lending to a family member, but this may result in tax implications.
Source: https://www.thebalancemoney.com/what-is-the-applicable-federal-rate-afr-5199170
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