What the AFR is
The applicable federal rate is a set of minimum interest rates the IRS publishes each month, derived from average market yields on U.S. Treasury securities under IRC § 1274(d). It is the floor for “adequate interest.” If a transaction that should carry interest charges at least the AFR, the tax law leaves it alone; charge less, and the difference is recharacterized — usually as a gift, sometimes as additional income — under the below-market rules of IRC § 7872.
The three tiers
The AFR comes in three tiers, chosen by the length of the obligation:
- Short-term — for terms of 3 years or less.
- Mid-term — for terms over 3 and up to 9 years.
- Long-term — for terms over 9 years.
Each tier is published for several compounding periods (annual, semiannual, quarterly, monthly); the annual figures are the ones usually quoted. A related rate, the § 7520 rate — 120% of the mid-term AFR, rounded — is the one that drives the valuation of the interests inside GRATs, charitable trusts, and retained life estates.
Where the AFR is used
- Intra-family loans. The AFR is the minimum rate that keeps a family loan from being a partial gift — see intra-family loans for how the below-market rules and the $10,000 and $100,000 exceptions work.
- Installment sales — including sales to an “intentionally defective” grantor trust — use the AFR as the note rate.
- GRATs, CLTs, and retained life estates use the § 7520 rate to value the retained or transferred interest. A lower § 7520 rate helps some strategies (GRATs) and hurts others (charitable remainder trusts), which is why planners watch it month to month.
July 2026 rates
| Tier | Loan / obligation term | AFR (annual) |
|---|---|---|
| Short-term | 3 years or less | 4.00% |
| Mid-term | over 3 and up to 9 years | 4.35% |
| Long-term | over 9 years | 4.98% |
| § 7520 rate | Trust & life-estate valuation (120% of mid-term AFR) | 5.20% |
Source: Rev. Rul. 2026-12 (rr-26-12.pdf), rates for July 2026, annual compounding; § 7520 rate from the same ruling. Read directly from the IRS ruling. AFRs are reset monthly — verify the current month at irs.gov/applicable-federal-rates.
Sources & methodology
Methodology & sources
The rate table on this page is taken directly from the IRS revenue ruling named above and is dated to the month that ruling covers. Because the IRS resets the AFRs every month, we date the figure to its ruling and link the live index rather than promising this page will always show the current month — an undated rate is worse than no rate. The definitions and uses are drawn from the Internal Revenue Code (§§ 1274(d), 7520, 7872). See our editorial standards.
This page is educational and is not legal or tax advice. Which AFR tier applies, and how the below-market and § 7520 rules play out, depend on the specific transaction — confirm your own with a qualified tax professional.
Rates as of July 2026. Page last verified July 26, 2026.