The minimum interest rate for a family loan, if you want to avoid IRS imputed interest, is the applicable federal rate (AFR) for the loan’s length, as set for the month you make the loan: the short-term rate for a loan of 3 years or less, the mid-term rate for more than 3 years up to 9 years, and the long-term rate for more than 9 years. A loan payable on demand uses the short-term rate as it changes. The IRS publishes all three rates every month. Charge at least the matching rate, sign a promissory note, and collect the payments the note calls for.
You may charge less, or nothing at all. A gift loan of $10,000 or less between two people generally falls outside the rules. Above that amount, the IRS treats the interest you did not charge as a gift to the borrower and as interest income to you, and on loans of $100,000 or less your imputed income is limited to the borrower’s net investment income. The rest of this guide shows which rate to use, lists the current and recent AFRs, and explains the gift tax, documentation, and reporting rules for a family loan.
What Is the Minimum Interest Rate for a Family Loan?
An intrafamily loan (also written intra-family loan) is a loan between family members, such as a parent lending a child money to buy a house or start a business. The IRS minimum interest rate for an intrafamily loan comes from 26 U.S.C. § 7872(e)(1), which defines a “below-market loan” as a demand loan where “interest is payable on the loan at a rate less than the applicable Federal rate” or a term loan where “the amount loaned exceeds the present value of all payments due under the loan.” Section 7872 handles a below-market loan by treating the interest you did not charge as though it had been paid, which makes the AFR the lowest interest rate you can charge a family member without triggering imputed interest.
So the federal minimum interest rate for a family loan is the AFR that matches the loan:
- For a term loan, which has a fixed repayment date, the AFR for the loan’s term in effect for the month you make the loan.
- For a demand loan, which is repayable whenever you ask, the short-term AFR as it changes over the life of the loan.
An AFR loan is a family loan that charges at least that rate. For a family loan made in 2024, 2025, or 2026, the minimum rate is the AFR for the month the loan was made, listed in the monthly tables in this guide. The IRS rules for loans to family members read the same in all three years, because Congress last amended section 7872 in 2017, in a provision on loans to continuing care facilities. What changes from year to year is the monthly AFR and the gift tax annual exclusion, which the IRS lists as $18,000 per recipient for 2024 and $19,000 for 2025 and 2026 in its Frequently Asked Questions on Gift Taxes.
What Is the Applicable Federal Rate (AFR)?
The applicable federal rate (AFR) is the set of interest rates the IRS determines every month under 26 U.S.C. § 1274(d), and tax law uses those rates as the benchmark for loans between family members and other related parties. Section 1274(d)(1)(B) states: “During each calendar month, the Secretary shall determine the Federal short-term rate, mid-term rate, and long-term rate which shall apply during the following calendar month.” The rates track what the federal government pays to borrow. The short-term rate is “based on the average market yield (during any 1-month period selected by the Secretary and ending in the calendar month in which the determination is made) on outstanding marketable obligations of the United States with remaining periods to maturity of 3 years or less,” and the mid-term and long-term rates are set “in accordance with the principles of clause (i).”
Treasury’s regulation fixes the measuring window: the rates “are based on the yield to maturity of outstanding marketable obligations of the United States of similar maturities during the one month period ending on the 14th day of the month preceding the month for which the rates are applicable” (Treas. Reg. § 1.1274-4(b)). The IRS publishes each month’s rates in a revenue ruling, and its applicable federal rates page lists the rulings “in reverse chronological order from the present back to January 2000.”
Short-Term, Mid-Term, and Long-Term AFR Definitions
Section 1274(d)(1)(A) sorts every loan into one of three rates by the length of its term:
| Term of the loan | Applicable federal rate |
|---|---|
| Not over 3 years | Federal short-term rate |
| Over 3 years but not over 9 years | Federal mid-term rate |
| Over 9 years | Federal long-term rate |
In plain terms, the IRS definition of a short-term loan for AFR purposes is one with a term of 3 years or less, a mid-term loan runs more than 3 years and up to 9 years, and a long-term loan runs more than 9 years. Section 1274(d)(3) adds that in determining a debt instrument’s term, “there shall be taken into account options to renew or extend.”
Current AFR Rates for Intrafamily Loans (October 2026)
As of October 14, 2026, the most recent ruling on the IRS’s applicable federal rates page is Rev. Rul. 2026-19, which sets the AFRs for October 2026:
| October 2026 AFR | Annual | Semiannual | Quarterly | Monthly |
|---|---|---|---|---|
| Short-term (3 years or less) | 4.25% | 4.21% | 4.19% | 4.17% |
| Mid-term (over 3 years to 9 years) | 4.61% | 4.56% | 4.53% | 4.52% |
| Long-term (over 9 years) | 5.22% | 5.15% | 5.12% | 5.10% |
These are the current family loan rates for a loan made in October 2026. Because the IRS sets new rates every month, open the ruling for the month you will actually make the loan before anyone signs the note; the IRS posts each one on its applicable federal rates page.
Which AFR Rate to Use for a Family Loan
Three facts decide which AFR to use for a family loan: whether it is a term loan or a demand loan, how long the term is, and how often the interest compounds.
Term Loans Lock In the Month’s Rate
For a term loan, 26 U.S.C. § 7872(f)(2)(A) uses “the applicable Federal rate in effect under section 1274(d) (as of the day on which the loan was made), compounded semiannually.” Pick the short-term, mid-term, or long-term rate that matches the term, from the ruling for the month you make the loan. Because the test uses the rate as of the day the loan was made, a later rise or fall in the AFR does not change the test for that loan, and you do not need to reset the note’s rate each month.
Demand Loans Use the Short-Term Rate
A demand loan is “any loan which is payable in full at any time on the demand of the lender” (26 U.S.C. § 7872(f)(5)). For a demand loan, section 7872(f)(2)(B) uses “the Federal short-term rate in effect under section 1274(d) for the period for which the amount of forgone interest is being determined, compounded semiannually.” A demand note with a fixed rate can therefore drop below the AFR when short-term rates rise. Each July, the IRS ruling also lists a “Section 7872(e)(2) blended annual rate” for the year: 5.03% for 2024 (Rev. Rul. 2024-13), 4.22% for 2025 (Rev. Rul. 2025-13), and 3.82% for 2026 (Rev. Rul. 2026-12).
Which Compounding Column to Use
Each monthly ruling states every AFR four ways, for annual, semiannual, quarterly, and monthly compounding. The four columns express the same rate: October 2026’s long-term AFR is 5.15% compounded semiannually, which works out to 5.22% compounded annually and 5.10% compounded monthly. Section 7872 measures the AFR “compounded semiannually,” so compare your note with the column that matches how its interest compounds. A note that charges interest once a year meets October 2026’s long-term AFR at 5.22%, and a note that compounds monthly meets it at 5.10%.
For a Minnesota loan under $100,000, state law gives you a reason to have the interest paid at least once a year. Minn. Stat. § 334.01, subd. 1 provides: “In the computation of interest upon any bond, note, or other instrument or agreement, interest shall not be compounded,” though the same sentence adds that a contract to pay interest on overdue interest, if not usurious, “shall not be construed to be usury.” Simple interest that piles up unpaid until the end of a multi-year term earns less than its stated rate, so a note like that can fall below the AFR even when its stated rate matches the AFR. A loan of $100,000 or more under a written contract signed by the borrower is exempt from the rest of chapter 334 (subdivision 2).
Example: A $100k Family Loan Repaid Over More Than 9 Years
For a $100k loan repaid over more than 9 years, use the long-term AFR for the month you make the loan. In October 2026, that is 5.22% with annual compounding, or 5.15% with semiannual compounding. That figure is the minimum for tax purposes; you can charge more, within the usury limits covered under “Can You Charge a Higher Interest Rate Than the AFR?” The same long-term rate applies to a family mortgage, such as a 30-year loan to help a child buy a home, because its term is over 9 years.
How to Use AFR Rates, Step by Step
- Decide whether the loan is a term loan with a fixed repayment date or a demand loan payable whenever you ask.
- For a term loan, count the term, including any renewal or extension options, and pick the short-term, mid-term, or long-term AFR.
- Open the revenue ruling for the month you will make the loan and read the AFR row of Table 1.
- Choose the compounding column that matches the note, and set the note’s rate at or above that figure.
- Write the rate, the payment schedule, and the maturity date into a promissory note that you both sign.
- Collect each payment on time, by check or bank transfer, and keep the records.
- Report the interest you receive on your income tax return.
AFR Rates for 2026, 2025, and 2024 by Month
The tables below list the annual-compounding AFR from Table 1 of each month’s revenue ruling, linked in the second column; each ruling also lists the semiannual, quarterly, and monthly versions. For a term loan, the row for the month you made the loan gives the rate that applies for the life of the loan.
2026 AFR Rates by Month
| Month | IRS ruling | Short-term | Mid-term | Long-term |
|---|---|---|---|---|
| January 2026 | Rev. Rul. 2026-2 | 3.63% | 3.81% | 4.63% |
| February 2026 | Rev. Rul. 2026-3 | 3.56% | 3.86% | 4.70% |
| March 2026 | Rev. Rul. 2026-6 | 3.59% | 3.93% | 4.72% |
| April 2026 | Rev. Rul. 2026-7 | 3.59% | 3.82% | 4.62% |
| May 2026 | Rev. Rul. 2026-9 | 3.82% | 4.08% | 4.83% |
| June 2026 | Rev. Rul. 2026-11 | 3.85% | 4.13% | 4.87% |
| July 2026 | Rev. Rul. 2026-12 | 4.00% | 4.35% | 4.98% |
| August 2026 | Rev. Rul. 2026-13 | 4.10% | 4.35% | 4.92% |
| September 2026 | Rev. Rul. 2026-17 | 4.18% | 4.49% | 5.12% |
| October 2026 | Rev. Rul. 2026-19 | 4.25% | 4.61% | 5.22% |
2025 AFR Rates by Month
| Month | IRS ruling | Short-term | Mid-term | Long-term |
|---|---|---|---|---|
| January 2025 | Rev. Rul. 2025-1 | 4.33% | 4.24% | 4.53% |
| February 2025 | Rev. Rul. 2025-5 | 4.34% | 4.52% | 4.86% |
| March 2025 | Rev. Rul. 2025-6 | 4.31% | 4.46% | 4.82% |
| April 2025 | Rev. Rul. 2025-8 | 4.16% | 4.21% | 4.61% |
| May 2025 | Rev. Rul. 2025-10 | 4.05% | 4.10% | 4.62% |
| June 2025 | Rev. Rul. 2025-12 | 4.00% | 4.07% | 4.77% |
| July 2025 | Rev. Rul. 2025-13 | 4.12% | 4.19% | 4.90% |
| August 2025 | Rev. Rul. 2025-14 | 4.03% | 4.06% | 4.82% |
| September 2025 | Rev. Rul. 2025-17 | 4.00% | 4.04% | 4.83% |
| October 2025 | Rev. Rul. 2025-19 | 3.81% | 3.87% | 4.73% |
| November 2025 | Rev. Rul. 2025-21 | 3.69% | 3.83% | 4.62% |
| December 2025 | Rev. Rul. 2025-24 | 3.66% | 3.79% | 4.55% |
2024 AFR Rates by Month
| Month | IRS ruling | Short-term | Mid-term | Long-term |
|---|---|---|---|---|
| January 2024 | Rev. Rul. 2024-02 | 5.00% | 4.37% | 4.54% |
| February 2024 | Rev. Rul. 2024-03 | 4.68% | 3.98% | 4.18% |
| March 2024 | Rev. Rul. 2024-04 | 4.71% | 4.13% | 4.40% |
| April 2024 | Rev. Rul. 2024-07 | 4.89% | 4.30% | 4.45% |
| May 2024 | Rev. Rul. 2024-09 | 4.97% | 4.42% | 4.55% |
| June 2024 | Rev. Rul. 2024-12 | 5.12% | 4.66% | 4.79% |
| July 2024 | Rev. Rul. 2024-13 | 5.06% | 4.49% | 4.61% |
| August 2024 | Rev. Rul. 2024-15 | 4.95% | 4.34% | 4.52% |
| September 2024 | Rev. Rul. 2024-17 | 4.57% | 4.02% | 4.37% |
| October 2024 | Rev. Rul. 2024-21 | 4.21% | 3.70% | 4.10% |
| November 2024 | Rev. Rul. 2024-24 | 4.00% | 3.70% | 4.15% |
| December 2024 | Rev. Rul. 2024-26 | 4.30% | 4.18% | 4.53% |
The $10,000 and $100,000 Family Loan Rules
Section 7872 sets two dollar thresholds for gift loans between individuals, and both turn on the total of all loans outstanding between the two of you.
Loans of $10,000 or Less
26 U.S.C. § 7872(c)(2)(A) provides: “In the case of any gift loan directly between individuals, this section shall not apply to any day on which the aggregate outstanding amount of loans between such individuals does not exceed $10,000.” The exception has limits. It does not cover “any gift loan directly attributable to the purchase or carrying of income-producing assets” (§ 7872(c)(2)(B)), so a $9,000 interest-free loan your son uses to buy stock is still covered by section 7872. Section 7872(f)(7) provides that “A husband and wife shall be treated as 1 person,” so loans from both parents to one child count together. And once section 7872 applies to a term loan, section 7872(f)(10) keeps it applying for gift tax purposes even after the balance drops to $10,000 or less.
Loans of $100,000 or Less
Section 7872(d)(1)(A) caps the lender’s imputed income: “For purposes of subtitle A, in the case of a gift loan directly between individuals, the amount treated as retransferred by the borrower to the lender as of the close of any year shall not exceed the borrower’s net investment income for such year.” If the borrower’s net investment income for the year does not exceed $1,000, it “shall be treated as zero” (§ 7872(d)(1)(E)(ii)), so you report no imputed interest. The cap is lost for any day the loans between you exceed $100,000 (§ 7872(d)(1)(D)), and for any loan whose interest arrangements have tax avoidance as “1 of their principal purposes” (§ 7872(d)(1)(B)). Subtitle A of the Internal Revenue Code is the income tax, so the cap does not shrink the gift side of the loan.
IRS Imputed Interest Rules for Below-Market Family Loans
How Imputed Interest Works Under Section 7872
Section 7872 is the IRS imputed interest rule for loans between family members, and it reaches other related-party loans too, including below-market loans between “an employer and an employee” and between “a corporation and any shareholder of such corporation” (26 U.S.C. § 7872(c)(1)).
The rule starts with forgone interest: the interest that “would have been payable on the loan for the period if interest accrued on the loan at the applicable Federal rate and were payable annually,” minus any interest actually payable (§ 7872(e)(2)). For a gift loan or a demand loan, section 7872(a)(1) treats the forgone interest as “(A) transferred from the lender to the borrower, and (B) retransferred by the borrower to the lender as interest,” and section 7872(a)(2) places both transfers “on the last day of such calendar year.”
For you as the lender, the retransfer is interest income, subject to the net investment income cap for loans of $100,000 or less. For the borrower, the transfer is a gift, and “Gross income does not include the value of property acquired by gift” (26 U.S.C. § 102(a)). The borrower is treated as paying the interest back to you, and IRS Publication 550 says the borrower “may be able to deduct that foregone interest as an expense if the loan proceeds are used for business or investment.” The imputed interest rate is the AFR, compounded semiannually, as explained under “Which AFR Rate to Use for a Family Loan.”
Gift Tax on a Below-Market Family Loan
How the gift is measured depends on the kind of loan:
- Demand loan: the forgone interest for each year is a gift, made on the last day of the year under section 7872(a).
- Term loan: 26 U.S.C. § 7872(d)(2) provides that “In the case of any gift loan which is a term loan, subsection (b)(1) (and not subsection (a)) shall apply for purposes of chapter 12,” and chapter 12 is the gift tax. Under section 7872(b)(1), the gift is made on the date of the loan and equals the excess of “the amount loaned” over “the present value of all payments which are required to be made under the terms of the loan.” An interest-free term loan therefore makes its whole gift up front.
The size of the loan does not make it a gift. If the loan is real, the gift is only the forgone interest (or the up-front discount on a term loan), plus anything you later forgive: Treas. Reg. § 25.2511-1(a) lists “the forgiving of a debt” among the ways a taxable transfer may be effected. The Instructions for Form 709 note that the gift tax “may also apply to forgiving a debt, to making an interest-free or below-market interest rate loan,” and they require a return when gifts to one person exceed the annual exclusion: “If you gave gifts to someone in 2025 totaling more than $19,000 (other than to your spouse), you must generally file Form 709.” The exclusion is $19,000 per recipient for 2026 as well, according to the IRS gift tax FAQ.
Filing a Form 709 does not mean paying gift tax. 26 U.S.C. § 2505(a) allows a credit against the gift tax based on “the applicable credit amount in effect under section 2010(c),” reduced by credit used in earlier years, and the applicable credit amount is the tax on the applicable exclusion amount. The basic exclusion amount is $15,000,000 for 2026 after Public Law 119-21 amended section 2010(c)(3), as the IRS gift tax FAQ explains, so gift tax is owed only after your lifetime taxable gifts use up that credit.
Imputed Interest Calculator: Two Worked Examples
An $80,000 demand loan. You lend your daughter $80,000, interest-free and payable on demand, and the full balance stays outstanding all of 2026. At the 2026 blended annual rate of 3.82%, the forgone interest for 2026 is about $3,056. Because the loans between you total $100,000 or less, your imputed interest income cannot exceed her net investment income, and if her net investment income is $1,000 or less, you report none. The $3,056 is still a gift to her, but the loan does not by itself require a Form 709 as long as your total gifts to her for 2026 stay at or under $19,000.
A $300,000 interest-free term loan. You lend your son $300,000 in October 2026, interest-free, with the whole amount due in 10 years. The October 2026 long-term AFR is 5.15% compounded semiannually. Discounted at that rate, the $300,000 repayment is worth about $180,423 on the day of the loan, so you make a gift of about $119,577 that day. That gift exceeds the $19,000 exclusion, so a Form 709 is due by April 15, 2027, and the part above the exclusion uses part of your basic exclusion amount. You also report imputed interest income of about $15,649 for each full year, with no cap, because the loan is over $100,000. A note at 5.22% with the interest paid every year avoids both results: there is no up-front gift, and you report only the interest you actually receive.
IRS Penalties for Unreported Imputed Interest
If imputed interest belongs on your return and you leave it off, the IRS can add the accuracy-related penalty in 26 U.S.C. § 6662(a): “an amount equal to 20 percent of the portion of the underpayment to which this section applies.” The penalty reaches underpayments attributable to “Negligence or disregard of rules or regulations” and to “Any substantial understatement of income tax” (§ 6662(b)(1) and (2)), and negligence “includes any failure to make a reasonable attempt to comply” with the tax code (§ 6662(c)). A below-AFR rate does not by itself turn the loan’s principal into a gift; that question turns on whether the loan is real, as explained under “Documenting an Intrafamily Loan So the IRS Treats It as a Loan.”
AFR vs. Adjusted AFR and the Section 7520 Rate
Each monthly ruling contains several tables, and only Table 1 governs a family loan. Rev. Rul. 2026-19 explains: “Table 1 contains the short-term, mid-term, and long-term applicable federal rates (AFR) for the current month for purposes of section 1274(d) of the Internal Revenue Code. Table 2 contains the short-term, mid-term, and long-term adjusted applicable federal rates (adjusted AFR) for the current month for purposes of section 1288(b).”
The adjusted AFR is used for tax-exempt obligations: 26 U.S.C. § 1288(b)(1) directs that “appropriate adjustments shall be made to the applicable Federal rate to take into account the tax exemption for interest on the obligation.” It runs lower than the AFR; October 2026’s long-term adjusted AFR is 3.95%, against a long-term AFR of 5.22% (both with annual compounding). A family loan uses the regular AFR in Table 1, because section 7872 points to the rate “in effect under section 1274(d).”
Table 5 holds the section 7520 rate, which values “any annuity, any interest for life or a term of years, or any remainder or reversionary interest” and equals “120 percent of the Federal midterm rate,” rounded “to the nearest 2/10ths of 1 percent” (26 U.S.C. § 7520(a)). The family loan test uses the Table 1 AFR instead; for October 2026, the section 7520 rate is 5.60%.
Documenting an Intrafamily Loan So the IRS Treats It as a Loan
Charging the AFR settles the interest question. Whether the money was a loan at all is a separate question, and the paperwork and the payments answer it. In Estate of Bolles v. Commissioner, T.C. Memo. 2020-71, a Tax Court memorandum opinion, the court listed “the traditional factors used to decide whether an advance is a loan or a gift”: “(1) there was a promissory note or other evidence of indebtedness, (2) interest was charged, (3) there was security or collateral, (4) there was a fixed maturity date, (5) a demand for repayment was made, (6) actual repayment was made, (7) the transferee had the ability to repay, (8) records maintained by the transferor and/or the transferee reflect the transaction as a loan, and (9) the manner in which the transaction was reported for Federal tax purposes is consistent with a loan.” The court added: “In the case of a family loan, it is a longstanding principle that an actual expectation of repayment and an intent to enforce the debt are critical to sustaining the tax characterization of the transaction as a loan.”
The facts of Bolles show how this plays out. A mother advanced her son more than $1 million from 1985 through 2007 and recorded the advances as loans, but there were “no loan agreements or attempts to force repayment.” The court found that the advances “were loans through 1989 but after that were gifts,” because by October 27, 1989, she “realized he was very unlikely to repay her loans.” The Ninth Circuit affirmed in an unpublished April 1, 2024, decision, which states that it is not precedent except as provided by Ninth Circuit Rule 36-3, and stated the starting point plainly: “Intrafamily transactions are presumed to be gifts.”
Treasury’s bad-debt regulation describes the same relationship: “A bona fide debt is a debt which arises from a debtor-creditor relationship based upon a valid and enforceable obligation to pay a fixed or determinable sum of money” (Treas. Reg. § 1.166-1(c)).
What the Promissory Note Should Say
A family promissory note should cover the facts the Bolles factors test:
- the lender, the borrower, the date, and the amount loaned;
- the interest rate, at or above the AFR for the loan’s term and month, and how the interest compounds;
- the payment schedule and a fixed maturity date, or a statement that the loan is payable on demand;
- what happens after a late payment or a default, and whether the borrower may prepay;
- any collateral, such as a recorded mortgage on real estate; and
- both signatures.
Pay by check or bank transfer rather than cash, keep a ledger of the payments, and report the loan the same way on both of your tax returns. For the basics of how a note works, see promissory notes: a simple explanation.
Promissory Note With a Balloon Payment
A promissory note with a balloon payment calls for small payments, often interest only, with the principal due in one large payment at the end. A balloon note works for a family loan if the borrower pays the interest at least once a year and only the principal balloons. Two tax rules penalize letting the interest accrue until the balloon date.
First, unpaid interest that does not compound earns less than its stated rate, so the note can be a below-market loan under section 7872(e)(1)(B) even when its stated rate equals the AFR. Using the $300,000 example under “Imputed Interest Calculator: Two Worked Examples,” a 10-year note at 5.22% simple interest, with all interest due at the end, has a present value of about $274,603 at the October 2026 long-term AFR, about $25,397 less than the amount loaned.
Second, deferred interest is original issue discount. 26 U.S.C. § 1273(a)(2) counts in a note’s “stated redemption price at maturity” all interest other than interest “payable unconditionally at fixed periodic intervals of 1 year or less during the entire term of the debt instrument,” and 26 U.S.C. § 1272(a)(1) then requires the holder to include that discount in income day by day as it accrues, even though no interest has been paid. The exception for loans between natural persons in section 1272(a)(2)(D) covers only loans that, added to prior loans between the two of you, do not exceed $10,000.
Consumer lenders disclose a balloon payment through the payment schedule that Regulation Z, the federal Truth in Lending rule, requires: the creditor discloses “the number, amounts, and timing of payments scheduled to repay the obligation” (12 C.F.R. § 1026.18(g)). Regulation Z covers credit only when “The offering or extension of credit is done regularly” (12 C.F.R. § 1026.1(c)(1)(ii)), and a person regularly extends consumer credit “only if it extended credit (other than credit subject to the requirements of § 1026.32) more than 25 times (or more than 5 times for transactions secured by a dwelling) in the preceding calendar year” (12 C.F.R. § 1026.2(a)(17)(v)). A parent making a single family loan generally falls outside that test, so state the balloon amount and due date plainly in the note itself. If the borrower cannot make the balloon payment, your choices are to extend the note in writing, to enforce it, or to forgive it; forgiving is a gift, as covered in intrafamily loan forgiveness.
Amortization Schedule for a Family Loan
An amortization schedule lists each payment’s date, its interest and principal, and the balance left after it. Any loan amortization schedule software produces one, and a simple loan amortization schedule in Excel takes a few columns: Excel’s PMT function returns the level payment from the rate per period, the number of payments, and the amount loaned. Use the same rate and compounding the note uses, attach the schedule to the note, and update it when a payment is late or extra. The schedule doubles as the record the Bolles factors look for: a fixed maturity date and the payments you expect to receive.
Reporting Requirements for Intrafamily Loans
Section 7872(a)(1)(B) treats forgone interest as “retransferred by the borrower to the lender as interest,” and Publication 550 says of that amount: “The lender must report that amount as interest income.” The lender carries most of the reporting:
| What | Who | When |
|---|---|---|
| Signed promissory note and amortization schedule | Lender and borrower each keep a copy | When the loan is made |
| Interest received, plus any imputed interest under section 7872 | Lender, on the income tax return | Each year |
| Form 709 gift tax return | Lender, when gifts to the borrower (forgone interest, an up-front term-loan gift, or forgiven amounts) plus other gifts to that person exceed the annual exclusion, $19,000 for 2026 | By April 15 of the year after the gift |
| Payment records | Lender and borrower | For the life of the loan |
A below-AFR rate does not by itself require a Form 709; the Instructions for Form 709 tie the filing duty to gifts that exceed the annual exclusion, and they set the deadline as “not later than April 15, of the year after the gift was made.” The borrower reports no income from a gift loan’s forgone interest, because gross income excludes gifts under section 102(a).
Can You Charge a Higher Interest Rate Than the AFR?
Yes. The AFR sets the minimum for tax purposes, and you report whatever interest you receive. The maximum comes from state usury law. In Minnesota, Minn. Stat. § 334.01, subd. 1 provides: “No person shall directly or indirectly take or receive in money, goods, or things in action, or in any other way, any greater sum, or any greater value, for the loan or forbearance of money, goods, or things in action, than $8 on $100 for one year.” That is an 8% annual limit. The same subdivision sets interest at “the rate of $6 upon $100 for a year, unless a different rate is contracted for in writing,” which is one more reason to put the rate in the note.
Larger loans escape the 8% limit. Under subdivision 2, “no limitation on the rate or amount of interest . . . applies” to a loan “made under a written contract, signed by the debtor, for the extension of credit to the debtor in the amount of $100,000 or more,” except as that subdivision provides for sections 58.137 and 47.20, which govern certain residential mortgage loans and contracts for deed. Other Minnesota statutes set their own limits for particular loans; for a business or agricultural loan under $100,000, Minn. Stat. § 334.011 allows interest of “not more than 4-1/2 percent in excess of the discount rate on 90-day commercial paper in effect at the Federal Reserve Bank in the Federal Reserve District encompassing Minnesota.” If you or the borrower live in another state, check that state’s usury law as well.
What Happens If a Family Loan Is Not Repaid?
A family loan that is not repaid raises two questions: what you can do to collect, and what the tax law makes of the unpaid balance.
Collecting When the Borrower Defaults
Your rights come from the note and Minnesota law: you can demand payment, accelerate the balance if the note allows it, sue on the note, and foreclose on any collateral. For a note payable at a definite time, Minn. Stat. § 336.3-118(a) requires an action to enforce it to “be commenced within six years after the due date or dates stated in the note or, if a due date is accelerated, within six years after the accelerated due date.” For a demand note, the action must be brought “within six years after the demand,” and if no demand is made, the note is barred “if neither principal nor interest on the note has been paid for a continuous period of ten years” (§ 336.3-118(b)). Section 336.3-118 governs notes that are negotiable instruments; other written contracts generally carry the six-year period in Minn. Stat. § 541.05, subd. 1. Formal collection steps are covered under collections.
The Tax Side of an Unpaid Family Loan
Forgiving the loan is a gift of the amount forgiven; Treas. Reg. § 25.2511-1(a) lists “the forgiving of a debt” as one way to make a taxable transfer. Continuing to advance money to a relative who cannot repay invites the result in Bolles, where the later advances were treated as gifts. If a real loan becomes uncollectible instead, you may have a deduction: under 26 U.S.C. § 166(d)(1)(B), when a nonbusiness debt “becomes worthless within the taxable year, the loss resulting therefrom shall be considered a loss from the sale or exchange, during the taxable year, of a capital asset held for not more than 1 year,” which 26 U.S.C. § 1222(2) defines as a short-term capital loss. Only a bona fide debt qualifies, under the definition in Treas. Reg. § 1.166-1(c).
Alternative Strategies for Intrafamily Financing
A loan is one of several ways to move money within a family, and the alternatives can be simpler in tax terms:
- Annual exclusion gifts: you can give up to $19,000 per recipient for 2026, or $38,000 per recipient when two spouses each give, according to the IRS gift tax FAQ. 26 U.S.C. § 2503(b) excludes “the first $10,000” of present-interest gifts to each person each year, adjusted for inflation.
- Tuition and medical payments: under section 2503(e), “Any qualified transfer shall not be treated as a transfer of property by gift,” including amounts paid “as tuition to an educational organization” or “to any person who provides medical care” on someone’s behalf.
- Part gift, part loan: give what fits within the annual exclusion and lend the rest at the AFR.
- Co-ownership: buy the property together, so each of you owns a share and no loan is needed.
- Installment sale: sell property to a family member and take back a note. Where section 1274 governs the note, “In the case of any sale or exchange, the applicable Federal rate shall be the lowest 3-month rate” (§ 1274(d)(2)(A)); see intrafamily bargain sale and intrafamily sale-leaseback.
- Family partnership or LLC: hold family assets in a limited partnership or an LLC and transfer interests over time, as covered in documenting family gifts of LLC interests.
Frequently Overlooked Aspects of Intrafamily Loans
A loan to a family member’s company does not get the $10,000 and $100,000 rules, because both apply only to a gift loan “directly between individuals” (§ 7872(c)(2)(A) and (d)(1)(A)). A below-market loan to your child’s corporation or LLC needs its own analysis.
An unpaid note is part of your estate. 26 U.S.C. § 2033 includes in the gross estate “the value of all property to the extent of the interest therein of the decedent at the time of his death.” Decide in your will or trust whether the borrower’s share is reduced by the balance or the note is forgiven at death; the trust in Bolles reduced the borrowing child’s share by “the amount of the child’s outstanding loans, if any, plus accrued interest.”
Planned forgiveness works only on a real loan. In Bolles, the mother “forgave the ‘debt’ account of each child every year on the basis of the gift tax exemption amount,” and the court observed that “Her practice would have been noncontroversial but for the substantial funds she advanced to Peter,” the son who could not repay.
Flexible repayment belongs in writing. If you are willing to defer payments in a hard year, say so in the note or in a signed amendment, so a skipped payment reads as an agreed change rather than a loan nobody enforces. Changing a signed note has its own risks, covered in altering promissory notes.
The rate mistakes to check for are using the AFR for the wrong month, the wrong term, or the wrong compounding column; charging a demand loan a fixed rate while short-term rates rise; and letting interest accrue to a balloon date. The documentation gaps to avoid include the two the Bolles court cited: no loan agreements and no attempts to force repayment.
A loan that helps a child buy into or buy out the family business belongs in the larger succession plan, covered in Minnesota business succession planning.
Seeking Professional Advice for Complex Situations
A straightforward family loan needs only a correct rate, a signed note, and steady payments. A few situations call for a closer look before you sign:
- a loan over $100,000, where the imputed income cap no longer applies;
- a loan to a child’s company or to a trust;
- refinancing an existing family loan after rates fall;
- a plan to forgive the loan over time;
- a family mortgage you want secured and recorded; and
- a borrower who may not be able to repay.
An attorney can draft the note, the mortgage, and any amendment so the documents match the tax analysis, and a CPA can handle the yearly interest reporting and any Form 709. For the gift tax side of family transfers, see gift tax, and for planning around a family business, see family business.
What happens if I forget to set an interest rate on a family loan?
The loan becomes an interest-free loan, which is a below-market loan under section 7872 of the Internal Revenue Code, and once the total loans between the two of you exceed $10,000, the imputed interest rules generally apply. For a demand loan, the interest you did not charge, measured at the short-term AFR, is treated each year as a gift to the borrower and as interest income to you, and your income is capped at the borrower’s net investment income if the total loans are $100,000 or less. For a term loan, the gift is measured up front as the difference between the amount loaned and the present value of the repayments. For a term loan, a signed note with a rate at or above the AFR for the loan’s term, as of the day the loan is made, avoids the gift for the life of the loan. For a demand loan, the test is the short-term AFR for each period, which changes monthly, so a fixed rate avoids imputed interest only while it stays at or above that rate.
Are there penalties for late payments on an intrafamily loan?
The note sets the consequences, so write any late charge or default terms into it. For a Minnesota loan under $100,000, avoid a higher interest rate after maturity: Minnesota Statutes section 334.01 says a provision providing for an increase of the rate of interest after maturity works a forfeiture of the entire interest, with exceptions for notes that bear no interest before maturity and for agreements that extend the maturity date. Collecting late payments matters for tax purposes too, because a demand for repayment and actual repayment are two of the factors the Tax Court weighs in deciding whether a family loan is a real loan.
Can family members co-sign an intrafamily loan?
Yes. A relative can sign the note as a co-signer, which gives the lender a second person to collect from. Under Minnesota’s version of the Uniform Commercial Code, a person who signs a negotiable note for accommodation is obliged to pay it in the capacity in which that person signs (Minnesota Statutes section 336.3-419). Whoever signs, the AFR analysis still turns on the loan’s term and the rates in effect.
How often do AFR rates change?
Every month. Section 1274(d) of the Internal Revenue Code directs the IRS to determine, during each calendar month, the short-term, mid-term, and long-term rates that apply during the following month, and the IRS publishes them in a revenue ruling. A term loan keeps the rate for the month it was made, while a demand loan is measured against the short-term rate as it changes.
Can I change the loan terms after the loan is made?
Yes, by a written amendment that you and the borrower both sign. Forgiving principal or interest that is already owed is a gift of the forgiven amount, and lowering the rate or stretching the term changes the AFR analysis, so run the numbers before you sign the change.
Are there limits on loan amounts within families?
The dollar amounts that matter are tax thresholds rather than caps. Section 7872 generally leaves gift loans of $10,000 or less between two individuals alone, and for loans of $100,000 or less it limits the lender’s imputed interest income to the borrower’s net investment income. In Minnesota, a loan of $100,000 or more under a written contract signed by the borrower is also exempt from the general 8% usury limit.
How can I avoid gift tax on a family loan?
Charge at least the AFR for the loan’s term and the month you make it, document and collect it as a real loan, and keep any gift element, such as forgone interest or forgiven payments, within the annual exclusion of $19,000 per recipient for 2026. A gift above the exclusion requires a Form 709, but no gift tax is due until your lifetime taxable gifts use up the credit tied to the basic exclusion amount, which is $15,000,000 for 2026.
