What is imputed interest on a family loan?

On a loan charging less than the IRS minimum rate (AFR), the IRS acts as if you charged the AFR and treats the shortfall as a gift from lender to borrower. It applies to loans over $10,000.

Do I owe tax on imputed interest?

Usually not. The imputed amount is a gift; under the $19,000 annual exclusion there's no filing, and above it you file a Form 709 but typically owe no tax as it draws on the lifetime exemption.

Free tool

Imputed interest calculator

When you lend a family member more than $10,000 at little or no interest, the IRS treats the interest you didn't charge — the gap between your rate and the Applicable Federal Rate (AFR) — as a gift to the borrower. This calculator shows how big that imputed gift is, and whether it crosses the $19,000 annual exclusion.

Your loan

We're a married couple splitting the gift (doubles the exclusion to $38,000)

Loan amount

Interest rate you're charging (%)

Loan term (years — sets the AFR)

The imputed gift

Applicable AFR (this term)—

Forgone interest (year one)—

Annual exclusion—

It shrinks every year — see the full picture.

Because the loan balance falls as it's repaid, the imputed gift declines each year. The Family Loan Calculator shows the year-by-year imputed gift and emails you the full schedule.

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How imputed interest works

What is imputed interest?

On a loan that charges less than the IRS minimum rate (the AFR), the IRS "imputes" the missing interest — it acts as if you charged the AFR, then treats the shortfall as a gift from you to the borrower. It applies to loans over $10,000.

Do I actually owe tax on it?

Usually not. The imputed amount is a gift, and if it (plus your other gifts to that person) stays under the $19,000 annual exclusion, there's nothing to file. Above it, you file a Form 709 but typically still owe no tax — it draws on your lifetime exemption.

How do I avoid imputed interest entirely?

Charge at least the current AFR for your loan's term. At or above the AFR, there's no forgone interest and no gift.

General information, not tax or legal advice. This estimates first-year forgone interest on the starting balance; the precise figure depends on the loan type and balance over time. AFRs change monthly — confirm with the IRS and your CPA.