Minimun AFR for Seller financing in Texas

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Minimun AFR for Seller financing in Texas

Xavier A. Malave
Brackettville, TX · Member since 2022 · 85 posts · 22 votes

Hello,

Quick question, do I need to put an interest rate on a seller financing deal in Texas to avoid problems with the IRS?

If so, what is the minimum AFR for a 36 months Self Storage deal?

I'll appreciate any help ASAP since I'm about to lose the deal haha

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  • Robert Masucci
    Real Estate Consultant · Remote · Member since 2025 · 48 posts · 21 votes
    1y

    Hey Xavier, this may be a question for your accountant, but why would you need to have an interest rate for the IRS requirements? 

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  • Xavier A. Malave
    OP
    Brackettville, TX · Member since 2022 · 85 posts · 22 votes
    1y

    That's what her attorney is saying.

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  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    1y
    Quote from @Xavier A. Malave:

    Hello,

    Quick question, do I need to put an interest rate on a seller financing deal in Texas to avoid problems with the IRS?

    If so, what is the minimum AFR for a 36 months Self Storage deal?

    I'll appreciate any help ASAP since I'm about to lose the deal haha


     you can charge whatever you want to the borrower but recognize IRS and your accountant will include a percentage of the payment as interest based on AFR. You can google what the AFR is right now but it is probably somewhere between 4 and 5%. So lets say you sold a property for $500k in 100 payments of $5,000. That would be $60k per year and if the rate was 4% you would compute $20k in interest. Soyou would pay ordinary income on that amount...

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  • Xavier A. Malave
    OP
    Brackettville, TX · Member since 2022 · 85 posts · 22 votes
    1y

    So I have to calculate the interest rate base on the year and not on the 18 months I'm putting on the deal?

    sorry just want to make sure

    this is how I see it 

    AFR right now is 3.26 if I'm not mistaken. 

    Price $575k x 0.0326 = $18,745

    $18,745/18 =$1,041 monthly on interest? 

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  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
    1y

    @Xavier A. Malave Yes, you need to charge interest on a seller-financed deal in Texas to comply with IRS rules and avoid having imputed interest applied. For your 36-month self-storage deal, you must use at least the mid-term Applicable Federal Rate (AFR), which for May 2025 is 4.25% (monthly compounding). Charging less than the AFR may trigger IRS scrutiny, gift tax implications, or require reporting phantom income. To stay compliant, include a minimum 4.25% interest rate in your promissory note, track payments, and issue a 1099-INT if required.

    This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

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  • Xavier A. Malave
    OP
    Brackettville, TX · Member since 2022 · 85 posts · 22 votes
    1y

    Awesome thank you so much for that information 

    any idea the interest rate for 18months for May?

    I saw 3.26 but I want to make sure since is my first time 

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