What about imputed interest?

You may have heard that you are required to charge a certain level of interest otherwise the IRS will impute an interest rate and tax you on interest that you should have charged.

This is covered by section 483 of the Internal Revenue Code, "Interest on Certain Deferred payments" and sections 1271 to 1274. These are original issue discount rules that prevent the seller from treating as capital gains the part of the selling price that really represented interest on delayed payments.

Before these laws were enacted, sellers would often omit interest from the contract and raise the price instead.

Note: Buyers may deduct for tax purposes, even though no interest is paid, the imputed interest per annum on the unpaid balances. By reallocating the face amount of the mortgage note, into part interest and part principal, the buyer may not only create an interest deduction, but also reduce the basis of the property purchased. This especially to the benefit of someone buying a home to live in as a principal residence, as there would (with few exceptions) be capital gains tax when they sell.

There are 3 Applicable Federal Rates

You can find all the applicable funds rates direct from the IRS here.

It is unlikely you would want to charge such a low interest rate anyway.

If you have a zero or low interest rate loan, check with your tax advisor. This article is only intended to give a brief overview of the tax rules as we understand them.

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