What Is Imputed Interest?

Imputed interest is interest that the IRS assumes was charged on a below-market loan, even if no interest was actually stated or paid. When you lend money to a family member or friend at a rate below the Applicable Federal Rate (AFR) — the minimum rate the IRS publishes monthly — the IRS may impute interest income to you as the lender and an interest expense to the borrower. For very small loans under $10,000, the imputed interest rules generally don't apply. For loans between $10,000 and $100,000, the rules only apply if the borrower has more than $1,000 of net investment income for the year. For loans over $100,000, the full AFR applies, and both lender and borrower must report their respective interest income and expense. Using an AFR-compliant rate on family loans avoids unintended gift or income tax consequences while still keeping the arrangement informal and family-friendly.