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AFR Calculator (Applicable Federal Rate)

Calculate applicable federal rates for loans and interest calculations.

One Hundred Thousand Dollars Only

Enter the principal amount of the loan
Applicable Federal Rate (AFR)
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The actual interest rate charged on the loan
Loan repayment period in years or months
How often payments are made

Enter loan details and click Calculate to see results

About AFR Calculator (Applicable Federal Rate)

What Are Applicable Federal Rates (AFR)?

Applicable Federal Rates (AFR) are minimum interest rates set monthly by the U.S. Internal Revenue Service (IRS) for private loans, gift loans, and other below-market transactions. These rates represent the minimum interest that must be charged on loans between related parties to avoid potential tax implications. The AFR system was established to prevent taxpayers from using interest-free or low-interest loans as a method to avoid taxes through income shifting or gift tax avoidance.

How AFR Rates Are Determined

The IRS sets AFRs based on the average market yields of U.S. government securities with similar maturities. These rates are published monthly in the IRS Revenue Rulings and are categorized into three term lengths: short-term (up to 3 years), mid-term (3-9 years), and long-term (over 9 years). The rates vary depending on the compounding period (annual, semi-annual, quarterly, or monthly) and are typically lower than commercial lending rates.

Common Uses of AFR Rates

Intra-Family Loans

AFRs are commonly used for loans between family members, such as parents lending money to children for home purchases or education. Using the AFR ensures the loan won't be treated as a taxable gift by the IRS.

Seller Financing

When property sellers provide financing to buyers, they must charge at least the AFR to avoid imputed interest rules. This is common in real estate transactions and business sales.

Corporate Shareholder Loans

Loans from corporations to shareholders must use AFR rates to avoid being treated as taxable dividends. This applies to both C-corporations and S-corporations.

Estate Planning

AFRs are used in sophisticated estate planning strategies like Grantor Retained Annuity Trusts (GRATs), Intra-Family Loans, and Charitable Lead Annuity Trusts (CLATs) to transfer wealth tax-efficiently.

Employee Loans

When employers provide loans to employees, they must charge at least the AFR to avoid the loan being treated as taxable compensation to the employee.

Deferred Payment Arrangements

Any agreement where payment is deferred (like installment sales) may need to account for AFRs to properly calculate imputed interest for tax purposes.

AFR Rate Categories and Terms

The IRS publishes several categories of AFRs each month, each serving different purposes in tax law. Understanding these categories is essential for proper application in financial transactions.

Short-Term AFR
  • • Applies to loans up to 3 years
  • • Based on average yield of 3-year Treasury securities
  • • Typically the lowest of the three rates
  • • Common for bridge loans and short-term financing
Mid-Term AFR
  • • Applies to loans from 3-9 years
  • • Based on average yield of Treasury securities with 3-9 year maturities
  • • Used for most intra-family loans
  • • Common for auto loans and equipment financing
Long-Term AFR
  • • Applies to loans over 9 years
  • • Based on average yield of Treasury securities over 9 years
  • • Used for long-term real estate financing
  • • Common for estate planning strategies

Special AFR Categories

Section 1274(d) AFR

These are the standard AFR rates used for most private loans and debt instruments. They're published monthly and apply to loans where the interest isn't otherwise clearly stated or is below market.

Section 382 AFR

Special rates used in corporate tax law, particularly for loss corporations undergoing ownership changes. These rates are generally higher than standard AFRs.

Section 7872 AFR

Rates applied to below-market loans between related parties. These are the same as the standard AFRs but have specific rules about imputed interest and gift tax consequences.

Tax Implications of AFR Loans

For Lenders
  • • Must report interest income on tax returns
  • • May need to impute additional interest if rate is below AFR
  • • Could trigger gift tax consequences for interest-free loans
  • • May need to file Form 709 for gift tax reporting
For Borrowers
  • • May be able to deduct interest if loan is for business or investment
  • • Mortgage interest may be deductible if secured by home
  • • Student loan interest may qualify for special deduction
  • • Personal interest generally not deductible

How to Structure an AFR Loan Properly

Step 1: Determine the Correct AFR Rate

Use the IRS-published rates for the month the loan originates. Choose the appropriate term (short, mid, or long) based on the loan's repayment schedule. Consider whether simple or compound interest applies.

Step 2: Create a Formal Loan Agreement

Document all loan terms including principal amount, interest rate (must meet or exceed AFR), repayment schedule, maturity date, and consequences of default. Both parties should sign and date the agreement.

Step 3: Establish a Repayment Plan

Set up a realistic repayment schedule with regular payments (monthly, quarterly, etc.). Consider using amortization tables to calculate principal and interest portions of each payment.

Step 4: Execute the Loan Properly

Transfer funds from lender to borrower with documentation. For real estate or large loans, consider using escrow services or recording deeds/mortgages as appropriate.

Step 5: Maintain Proper Records

Keep copies of all loan documents, payment records, and correspondence. Both parties should maintain separate records. Track interest payments for tax reporting purposes.

Common Mistakes to Avoid with AFR Loans

While AFR loans can be powerful financial tools, they come with potential pitfalls. Avoiding these common mistakes can prevent unexpected tax consequences:

Documentation Errors
  • • Failing to create a written loan agreement
  • • Not specifying repayment terms clearly
  • • Omitting important details like maturity date
  • • Not documenting actual fund transfers
Rate Selection Mistakes
  • • Using the wrong term category (short vs. long)
  • • Not using the rate for the correct month
  • • Forgetting to adjust for compounding frequency
  • • Not updating variable rate loans properly

Recent Trends in AFR Rates

AFR rates have experienced significant fluctuations in recent years due to changing economic conditions and Federal Reserve monetary policy:

Historical Context
  • • 2020-2021: Record low rates during pandemic
  • • 2022-2023: Rapid increases with Fed rate hikes
  • • 2024: Stabilization at higher levels
  • • Long-term average: 4-6% for mid-term rates
Current Environment
  • • Rates remain elevated compared to 2020 lows
  • • Short-term rates most sensitive to Fed policy
  • • Long-term rates reflect inflation expectations
  • • Monthly volatility has increased

Using Our AFR Calculator

Our AFR calculator helps you determine the appropriate interest rate for private loans and calculate payment schedules that comply with IRS requirements. Simply select the loan type, term length, and origination date to get the correct AFR rate. The calculator can also generate amortization schedules and compare different loan scenarios.

Whether you're setting up an intra-family loan, seller financing arrangement, or corporate shareholder loan, our calculator ensures you use the proper AFR rate for your specific situation. This helps avoid unintended tax consequences while providing clear documentation of your loan terms.

When to Consult a Tax Professional

While our AFR calculator provides valuable guidance, certain situations warrant professional tax advice:

Complex Transactions
  • • Loans over $100,000
  • • Loans with forgiveness provisions
  • • Loans involving trusts or estates
  • • Cross-border lending arrangements
Special Circumstances
  • • Suspected IRS scrutiny or audits
  • • Loans with equity conversion features
  • • Loans involving minors or incapacitated persons
  • • Situations with potential gift tax implications

Additional Resources

For more information about AFRs and related tax rules, consult these official resources:

  • • IRS Revenue Rulings (monthly AFR publications)
  • • IRS Publication 550 (Investment Income and Expenses)
  • • IRS Publication 535 (Business Expenses)
  • • Internal Revenue Code Sections 1274, 7872
  • • Treasury Regulations Section 1.1274-4

Frequently Asked Questions

What are Applicable Federal Rates (AFR)?
Applicable Federal Rates are minimum interest rates set monthly by the IRS for private loans between related parties. These rates prevent tax avoidance by ensuring loans charge adequate interest to avoid being treated as gifts or below-market loans.
Why are AFRs important?
AFRs establish the minimum interest rate you must charge on private loans to avoid IRS imputing additional interest income or gift tax consequences. Using AFRs ensures your loan complies with tax regulations.
How often do AFRs change?
The IRS publishes new AFRs monthly, typically during the first week of each month. Rates are based on average market yields of U.S. government securities with similar maturities.
What are the different AFR categories?
AFRs come in three term lengths: Short-term (≤3 years), Mid-term (3-9 years), and Long-term (>9 years). Each has rates for annual, semi-annual, quarterly, and monthly compounding.
When must I use AFRs?
You must use AFRs for: intra-family loans, shareholder loans, seller financing, deferred payment arrangements, and any loan where the interest isn't clearly stated or is below market rate.
How do I calculate interest using AFR?
Multiply the loan principal by the appropriate AFR rate (based on term and compounding frequency). For example, a $100,000 5-year loan using 3% mid-term AFR would accrue $3,000 annual interest.
What happens if I charge less than the AFR?
The IRS may impute additional interest income to the lender (taxable) and treat the difference as a gift (potentially subject to gift tax). This applies to both interest-free and low-interest loans.
Are there exceptions to AFR requirements?
Yes, exceptions include: loans under $10,000 (unless used for income-producing assets), gift loans between individuals ≤$100,000, and loans where forgone interest is ≤$1,000 annually.
How do I document an AFR-compliant loan?
Create a written agreement specifying: loan amount, AFR rate used, repayment terms, maturity date, and consequences of default. Both parties should sign and date the document.
What's the difference between AFR and market rates?
AFRs are typically lower than commercial lending rates because they're based on government security yields rather than bank rates. This makes AFR loans attractive for family financing.
How do AFRs affect intra-family loans?
Using AFRs allows family members to lend money at lower-than-market rates without triggering gift tax implications, making it a popular estate planning tool.
What's the current short-term AFR?
As of [Current Month Year], the short-term AFR is [X]% for annual compounding. Always check the latest IRS publication for current rates as they change monthly.
How do I choose the right AFR term?
Match the AFR term category to your loan's repayment schedule. If the loan has balloon payments or irregular terms, use the term that most closely matches the actual duration.
Can I use AFR for business loans?
Yes, AFRs apply to loans between businesses and their shareholders/owners. Corporations lending to shareholders must use AFR to avoid the loan being treated as a taxable dividend.
What's the penalty for not using AFR?
The IRS may reclassify the loan, resulting in: imputed interest income to lender, gift tax consequences, and potential penalties for both parties. Proper documentation avoids these issues.
How does compounding frequency affect AFR?
More frequent compounding (monthly vs annually) slightly increases the effective interest rate. Choose the compounding method that matches your repayment schedule or provides the best terms.
Are AFR loans secured or unsecured?
AFR loans can be either. While most private AFR loans are unsecured, you can add collateral. The security doesn't affect the AFR requirement but may influence the lender's risk assessment.
How do AFRs apply to real estate loans?
For seller financing or family real estate loans, use the appropriate AFR term based on the repayment schedule. Long-term AFRs typically apply to mortgages over 9 years.
What's the difference between AFR and Section 7520 rate?
AFR applies to loans, while the Section 7520 rate (120% of mid-term AFR) is used for valuing annuities, life estates, remainders, and charitable lead trusts.
Can I charge more than the AFR?
Yes, you can charge above the AFR (market rate), but not below. Charging higher interest doesn't trigger tax consequences but may affect the borrower's ability to repay.
How do AFRs affect installment sales?
For installment sales where payments extend beyond one year, you must charge at least the AFR or the IRS will impute additional interest, increasing your taxable income.
What records should I keep for AFR loans?
Maintain: signed loan agreement, payment records, AFR rate documentation, IRS filings (if applicable), and any correspondence. Keep these for at least 3 years after loan repayment.
How do I report AFR loan interest?
Lenders report interest income on Schedule B (Form 1040). Borrowers may deduct interest if the loan qualifies (e.g., mortgage, business, or investment loan). File Form 1099-INT if paying $600+ interest annually.
Can I forgive an AFR loan?
Loan forgiveness may trigger tax consequences. The forgiven amount could be treated as taxable income to the borrower and/or a taxable gift. Consult a tax professional before forgiving loans.
How do AFRs apply to employee loans?
Employers must charge employees the AFR or higher, otherwise the difference is treated as taxable compensation. This applies to both cash loans and below-market company credit.
What's the difference between AFR and OID rules?
AFR sets minimum rates, while Original Issue Discount (OID) rules govern how discount (difference between face value and issue price) is taxed over the loan term. Both may apply to certain loans.
Can I refinance an AFR loan?
Yes, you can refinance using current AFRs. Document the refinancing as a new loan agreement. The new rate must meet or exceed the AFR in effect at refinancing.
How do AFRs affect GRATs?
Grantor Retained Annuity Trusts (GRATs) use the Section 7520 rate (based on AFR) to calculate taxable gifts. Lower AFRs make GRATs more effective for wealth transfer strategies.
What's the AFR for demand loans?
Demand loans (no fixed term) use the short-term AFR that changes annually. The rate is recalculated each year based on that year's applicable short-term federal rate.
How do state laws affect AFR loans?
While AFR is a federal requirement, state usury laws may impose maximum interest rates. Most states exempt private loans between individuals from usury limits, but verify your state's rules.
Can I use AFR for loans to trusts?
Yes, loans to trusts must use AFR to avoid negative tax consequences. This includes loans from individuals to their revocable living trusts or other trust arrangements.
How do I calculate AFR for partial year loans?
For loans not spanning full years, prorate the annual AFR interest. Calculate daily interest by dividing the annual rate by 365, then multiply by the actual days outstanding.
What's the difference between AFR and LIBOR/SOFR?
AFR is for tax compliance on private loans, while LIBOR/SOFR were market benchmarks for commercial loans. AFR is fixed monthly; LIBOR/SOFR fluctuated daily based on interbank rates.
Can I use AFR for foreign currency loans?
AFR applies to USD-denominated loans. For foreign currency loans, you must calculate the USD equivalent of interest using AFR and document exchange rates carefully.
How do AFRs apply to promissory notes?
Promissory notes between private parties must charge at least the AFR to avoid imputed interest. Document the note clearly with the AFR rate, payment terms, and maturity date.
What's the penalty for AFR non-compliance?
Penalties may include: interest adjustments, gift tax assessments (up to 40%), accuracy-related penalties (20%), and in severe cases, fraud penalties (75%). Proper documentation avoids these.
How do I find historical AFR rates?
The IRS publishes AFR archives on its website. You can also find them in monthly Revenue Rulings, tax professional resources, or through the Federal Reserve's historical data.
Can AFR loans have variable rates?
Yes, but the rate must never fall below the AFR in effect when the loan was made. Most variable-rate AFR loans use the short-term AFR adjusted annually.
How do AFRs affect charitable lead trusts?
Charitable Lead Annuity Trusts (CLATs) use the Section 7520 rate (based on AFR) to calculate charitable deductions and taxable gifts. Lower AFRs benefit CLAT creators.
What's the difference between AFR and bank CD rates?
AFRs are typically lower than CD rates because they're based on government securities, while CDs reflect bank funding costs. AFRs serve a regulatory purpose, not market competition.
Can I use AFR for loans to LLCs?
Yes, loans to LLCs from members or third parties must use AFR to avoid recharacterization as capital contributions or taxable distributions. This applies to both single and multi-member LLCs.
How do AFRs apply to split-interest loans?
For loans where interest payments are split between parties (e.g., family members), each portion must meet the AFR requirement for its respective borrower-lender relationship.
What's the AFR for loans under one year?
Use the short-term AFR for loans ≤1 year. The rate is the same whether the term is 1 month or 12 months, but total interest varies with the actual loan duration.
How do I amend an existing loan to comply with AFR?
Execute a loan modification agreement specifying the new AFR-compliant terms, effective date, and any adjustments to principal or payments. Both parties should sign the amendment.

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