What Is the Applicable Federal Rate?

The Applicable Federal Rate (AFR) is the minimum interest rate the IRS sets for loans between related parties — such as family members — to avoid triggering unintended gift tax or imputed income consequences. The IRS publishes three AFR tiers monthly: short-term (for loans up to 3 years), mid-term (3-9 years), and long-term (over 9 years). If you lend money to a family member at a rate below the applicable AFR, the IRS may treat the interest you should have charged as a gift from you to the borrower, or impute interest income to you that must be reported on your tax return even if you never received it. For loans under $10,000, the AFR rules generally don't apply. Using an AFR-compliant interest rate allows you to make an intra-family loan — a legitimate way to lend at lower rates than a bank while still avoiding IRS scrutiny — without creating a taxable gift equal to the forgone interest.