Applicable Federal Rate (AFR): What It Is and Where to Find It

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H1

Applicable Federal Rate (AFR): What It Is

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ANSWER SECTION

The Applicable Federal Rate (AFR) is the minimum interest rate that the IRS requires for loans between related parties—such as family members or businesses and their owners—to be treated as legitimate loans rather than disguised gifts. Published monthly by the IRS, AFR serves as a benchmark to prevent taxpayers from avoiding taxes by making interest-free or below-market loans. If you lend money to a family member at less than the AFR, the IRS may impute interest—calculating what interest should have been charged—and tax you on that amount as if you received it, while also potentially triggering gift tax consequences.

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H2: How AFR Is Calculated

The Calculation Method:

AFR rates are based on the average market yield of U.S. Treasury securities:

Short-Term AFR:

• Based on 3-month Treasury bills
• Average of the last month
• Rounded to nearest 0.01%

Mid-Term AFR:

• Based on obligations with maturities of 3-9 years
• Average of the last month
• Rounded to nearest 0.01%

Long-Term AFR:

• Based on obligations with maturities over 9 years
• Average of the last month
• Rounded to nearest 0.01%

Compounding Methods: Each AFR category has four compounding options:

Compounding	When to Use
Annual	Interest compounded once per year
Semiannual	Interest compounded twice per year
Quarterly	Interest compounded four times per year
Monthly	Interest compounded twelve times per year

Why These Rates?

• IRS wants to approximate market rates
• Prevents tax avoidance through below-market loans
• Provides objective, published standard

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H2: The Three AFR Categories

1. Short-Term AFR (0-3 years):

Used For:

• Personal loans under 3 years
• Demand loans
• Bridge loans
• Short-term business financing

Current Range (2025):

• Approximately 4.31% to 4.40%

2. Mid-Term AFR (3-9 years):

Used For:

• Auto loans
• Personal loans 3-9 years
• Equipment financing
• Medium-term notes

Current Range (2025):

• Approximately 4.07% to 4.14%

3. Long-Term AFR (Over 9 years):

Used For:

• Mortgages
• Long-term family loans
• Real estate financing
• Estate planning transactions

Current Range (2025):

• Approximately 4.40% to 4.49%

Choosing the Right Category:

• Match your loan term to the category
• Use the rate in effect when the loan is made
• Lock in that rate for the loan's life

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H2: Where to Find Current AFR Rates

Official Sources:

1. IRS Revenue Rulings:

• Published monthly, usually mid-month
• Available at IRS.gov
• Search "AFR" or "Revenue Ruling AFR"

2. IRS Internal Revenue Bulletin:

• Monthly publication
• Contains official AFR tables

3. Commercial Tax Services:

• CCH, BNA, and others
• Track AFR monthly
• Often include historical rates

4. Financial Websites:

• Many track and publish AFR
• May have calculators and tools

Historical Rate Context:

Period	Short-Term	Mid-Term	Long-Term
2020 (pandemic low)	~0.11%	~0.52%	~1.31%
2022	~2.5%	~2.8%	~3.2%
2023	~4.5%	~3.9%	~4.0%
2025 (current)	~4.4%	~4.1%	~4.5%

Important: Always verify current rates before making loans.

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H2: When AFR Matters

Situations Requiring AFR Compliance:

Family Loans:

• Parent lending to child for home purchase
• Sibling-to-sibling loans
• Loans to extended family members
• Must charge AFR or face imputed interest

Business-Related Party:

• Shareholder loans from corporation
• Partnership loans to partners
• Parent-subsidiary loans
• Intercompany financing

Estate Planning:

• Installment sales to grantor trusts
• Self-canceling installment notes (SCINs)
• Private annuities
• Intra-family sales

Seller Financing:

• Owner-financed real estate sales
• Business sales with seller financing
• Must meet AFR to avoid imputed interest

When AFR Doesn't Apply:

Gifts:

• True gifts don't require interest
• Annual gift tax exclusion: $18,000 (2025)
• Lifetime exemption: $13.61 million (2025)

Commercial Loans:

• Bank loans at market rates
• Unrelated party transactions
• Arm's length business deals

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H2: Consequences of Below-AFR Loans

Imputed Interest Rules:

If You Charge Below AFR:

Lender Consequences:

• Must report imputed interest as taxable income
• Even though you never received the money
• May owe income tax on phantom income

Borrower Consequences:

• Receives imputed interest as a gift
• May require gift tax return (Form 709)
• Could use annual exclusion or lifetime exemption

Example Calculation:

$200,000 Loan to Child at 0%:

• Long-term AFR: 4.49%
• Imputed interest: $200,000 × 4.49% = $8,980

Tax Impact:

• Parent reports $8,980 interest income
• Parent pays tax at marginal rate (e.g., 24% = $2,155)
• Child has $8,980 gift
• Gift tax return required (but likely no tax due due to exemption)

$100,000 Exception: If loan is $100,000 or less:

• Imputed interest limited to borrower's net investment income
• No imputed interest if borrower's net investment income ≤ $1,000
• Must be proven with borrower's tax return

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H2: Related Tax Questions

For current monthly AFR rates and tables, see our guide on AFR rates with complete historical data.

Learn about the specific AFR rate terminology in our guide on AFR rate with detailed usage examples.

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