Intra-Family Loans and the Applicable Federal Rate

A loan is not a gift

A genuine loan is not a gift: the borrower is obligated to repay, so nothing has been given away. That makes an intra-family loan a useful way to help a relative without using any annual exclusion or lifetime exemption. But the tax law will only respect it as a loan if it looks like one — a real obligation to repay, and, crucially, adequate interest. Charge too little, and the IRS treats the shortfall as a gift after all, under the below-market-loan rules of IRC § 7872.

The applicable federal rate

“Adequate interest” has a precise floor: the applicable federal rate, or AFR. The IRS publishes AFRs every month in a revenue ruling, in three tiers by loan length — short-term (up to 3 years), mid-term (over 3 up to 9 years), and long-term (over 9 years) — derived from average market yields on Treasury securities (IRC § 1274(d)). A family loan should be documented and administered as bona fide debt. The relevant AFR depends on the loan’s term and compounding period. A term loan generally uses the AFR in effect when the loan is made; demand-loan calculations can vary over time under IRC § 7872.

What happens if you charge too little

If the loan charges less than the AFR, § 7872 recharacterizes the arrangement — and the mechanics differ sharply between a demand loan and a term loan. For a below-market demand gift loan, IRC § 7872 generally imputes an annual transfer and interest payment based on forgone interest: the law treats the lender as having made a gift of the forgone interest to the borrower and simultaneously as having received that interest back as taxable income — even though no cash changed hands. For a below-market term gift loan, the statute can treat the lender as making an upfront gift equal to the loan proceeds minus the present value of the required payments, with related original-issue-discount consequences — so the entire deemed gift can fall in the year the loan is made, rather than spread year by year. Charging the AFR for the loan’s term avoids the below-market treatment.

The $10,000 and $100,000 rules

Two statutory thresholds soften the rule for smaller family loans, but each is limited:

• The $10,000 de minimis exception. The below-market rules generally do not apply to gift loans between individuals whose total outstanding balance stays at or under $10,000 (IRC § 7872(c)(2)). The exception is limited and does not apply when a principal purpose is tax avoidance; income-producing use can also matter.
• The $100,000 limit on imputed income. For qualifying individual gift loans not exceeding $100,000, imputed interest may be capped by the borrower’s net investment income — and is treated as zero if that income is $1,000 or less (§ 7872(d)(1)) — but the rule does not eliminate the need for bona fide debt, documentation, or other gift-tax analysis, and does not make the loan or all transfers tax free.

These dollar thresholds are fixed by statute and are not inflation-indexed, so the same $10,000 and $100,000 figures have applied for years. The AFRs themselves, by contrast, change monthly: the July 2026 annual AFRs are 4.00% short term, 4.35% mid term, and 4.98% long term (Rev. Rul. 2026-12, Table 1). Because AFRs change monthly, each displayed rate should retain its month-and-year label or link to the current IRS monthly ruling.

Making it a real loan

To be respected, an intra-family loan should look like an arm’s-length one: a written promissory note stating the amount, an interest rate at least equal to the AFR for the term, a repayment schedule, and an actual pattern of repayment. Forgiving payments as you go can turn the “loan” into a gift and, if done from the start, can suggest there was never an intent to be repaid — which would make the whole transfer a gift. Used properly, though, the intra-family loan is a clean tool: it can help a family member at a rate far below a commercial lender’s while spending none of your exclusion, and it underlies more advanced techniques such as sales to grantor trusts. How it compares with an outright gift is the subject of the gifting-versus-inheriting page.

Sources & methodology