Imputed Interest from the IRS - What is that?

[Brian Gibbons]

I bet if you asked 100 people on Bigger Pockets the would not be able to define "imputed interest".

I am thankful to @Bill Gulley to motivate and to write about "imputed interest" re: seller financing.

The definition of IRS imputed interest is interested the IRS creates on a personal loan, and taxes the lender down the road, even if the lender is not actually collecting interest.

What if you let your son $30,000 to be paid back over 10 years interest rate, the IRS will imputed interest rate on the loan and tax year as if the imputed interest were actually being collected by you as income. For many reasons it makes sense to charge a minimal interest rate on all loans, including loans made to trusted friends and family.

The imputed interest rules apply to loans that are made interest-free, or at a discounted interest rate that is below market. The imputed interest rules prevent the transfer of wealth for the purpose of avoiding higher taxes.

How can you avoid imputed interest? The obvious way is to charge a minimum interest rate on all loans, including loans made to family.

What I understand the minimum interest is calculated by the IRS depending on the size of the term of the loan. The rates are frequently updated, so it's best to check with the most current IRS tax tables, which can be found on the IRS's website.

Sunday charge at least the minimum rate listed on the stable, referred to as the applicable federal rate, you and I have any problems with the imputed interest.

And you do need paperwork that portrays the loan. If you own $30,000 to your son, and your son cannot pay you back, you will want to write off the $30,000 off your taxes is a bad loan docs, which can reduce your total taxes paid.

Three need good documentation. Also you will want documentation explaining whether or not your daughter must pay back the loan to your state if you pass away, or when the loan is going to be forgiven. For many reasons, it makes sense to avoid imputed interest by documenting the loan and charging the minimal amount interest, even to family.

In Seller Financing, charge 'em interest, no 0% loans.

See http://apps.irs.gov/app/picklist/list/federalRates.html for IRS Tax Tables