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IRS AFR Intra-Family Loan Calculator
Calculate statutory August 2026 IRS Applicable Federal Rates (AFR) for intra-family loans and check imputed interest gift tax risk under RR-2026-12.
Try it nowGuide & How-To
Lending money to family below 4.35% this August? On a $100,000 five-year loan, every point you undercut the IRS floor becomes taxable income you never received. Enter your loan amount, term, and the rate you plan to charge; the calculator pulls the correct August 2026 AFR (Rev. Rul. 2026-13), shows the imputed-interest gap, and tells you whether your arrangement is clean, taxable, or drifting into gift territory under IRC Section 7872.
The three rates that matter in August 2026
Short-term loans (3 years or less) need at least 4.10% annual, mid-term (over 3 up to 9 years) 4.35%, and long-term (over 9 years) 4.92%. Monthly-compounding equivalents run slightly lower at 4.03%, 4.26%, and 4.81%. Your rate locks in the month you sign, so an August note keeps its August floor for the life of the loan.
When to run this before signing
Use it for the classic cases: helping a child with a house down payment, refinancing a relative out of an expensive bank loan, or seller-financing a property inside the family. In each one, the note's rate against the AFR decides whether the arrangement generates phantom taxable income, silent gifts against your $19,000 annual exclusion, or neither.
What the numbers actually mean for you
The phantom income problem: you get taxed on interest nobody paid
Here is the part that catches families off guard: charge your brother 0% on a $100,000 loan and the IRS taxes YOU on roughly $4,350 of interest you never received. That is not a penalty for doing something wrong. It is just how Section 7872 closes the door on disguising gifts as loans.
The fix costs almost nothing. Write the AFR into the note and have the borrower actually pay it. At 4.35% on $100,000, your brother pays $4,350 a year to you instead of $7,000 to a bank at 7%, you pay tax on real income instead of phantom income, and the whole arrangement survives an audit.
One month, three rates, locked for the life of the loan
The AFR is not one number. In August 2026 (Rev. Rul. 2026-13, annual compounding) a loan of up to 3 years needs 4.10%, over 3 and up to 9 years needs 4.35%, and anything longer needs 4.92%.
Two things matter in practice. First, the rate is set by the month you SIGN, not the month you repay: a 9-year loan signed in August 2026 keeps its 4.35% floor even if rates double later. Second, the term boundaries are sharp: stretching a note from 9 to 10 years jumps the floor from 4.35% to 4.92%, which on $200,000 is an extra $1,140 of required interest every year.
The two escape hatches: $10,000 and $100,000
Below $10,000 of total outstanding loans between the same two people, Section 7872 simply does not apply, as long as the money is not used to buy income-producing assets. Lend your daughter $8,000 for a used car at 0% and there is nothing to report.
Between $10,001 and $100,000 there is a softer valve: imputed interest is capped at the borrower's net investment income for the year, and if that income is $1,000 or less it is treated as zero. A $60,000 loan to a son whose savings earn $400 a year produces no phantom income at all. Cross $100,000 and both hatches slam shut: the full AFR deficit applies, period.
Paper beats trust: what keeps a loan from becoming a gift
If the IRS reclassifies your loan as a gift, the entire principal eats into your lifetime gift and estate exemption, not just the interest gap. The pattern that triggers it: no written note, no fixed schedule, no interest, and no actual repayments.
The defense is boring and cheap: a signed promissory note stating principal, the AFR-or-better rate, and a repayment schedule; actual payments moving between real bank accounts; and Form 709 filed in any year total gifts to that person pass $19,000. Ten minutes of paperwork protects a six-figure exemption.
Why families still do this: the 4.35% vs 7% spread
Run the borrower's side of Maya's loan and the appeal is obvious. Her brother pays 4.35% on $100,000 instead of roughly 7% on a bank personal loan or investment-property mortgage: about $2,650 a year saved, with the interest staying inside the family instead of going to a lender.
That spread is the honest version of this strategy: charge exactly the AFR, keep the note enforceable, and the family collectively pockets the difference between the IRS floor and retail credit pricing. The calculator's required-interest output is the number to write into the note to get that outcome with zero imputed-interest exposure.
How the imputed interest math works
The IRS does not care what interest rate you agreed on at the kitchen table. If you charge a family member less than the Applicable Federal Rate for the month the loan starts, IRC Section 7872 taxes you as if you had charged the AFR anyway. The difference is called imputed interest, and it lands on your return whether or not a dollar of it ever changed hands.
The calculator above runs this exact test: it picks the August 2026 AFR for your term, compares it against what you actually charge, and shows the annual and full-term shortfall the IRS treats as taxable interest to you and a gift to the borrower.
Calculation Steps:
- Check the $10,000 de minimis exception first: if all outstanding loans between the two of you total $10,000 or less, imputed interest is off the table under §7872(c)(2).
- Pick the term category: short-term for 3 years or less (4.10% in August 2026), mid-term for over 3 up to 9 years (4.35%), long-term above 9 years (4.92%).
- Subtract the rate you actually charge from the statutory AFR.
- Multiply the loan principal by that deficit: that is the annual imputed interest the lender reports as income and the IRS counts as a gift to the borrower.
Worked example
Maya lends her brother $100,000 for 5 years at 3% so he can escape a 7% bank loan. Five years is a mid-term loan, so the August 2026 AFR floor is 4.35%.
She charges $3,000 a year. The IRS says the minimum was $4,350. The $1,350 gap is imputed interest: Maya reports it as taxable interest income even though her brother never paid it.
The same $1,350 also counts as an annual gift from Maya to her brother. On its own it sits comfortably under the $19,000 annual gift exclusion for 2026, but it stacks with any other gifts she makes him that year.
Over the full 5-year term the phantom income adds up to $6,750. That is the real price of the friendly rate, and it is what this calculator puts in front of you before you sign anything.
Input definitions
Review the glossary of terms used in the calculation model below. Click on highlighted links to read more in-depth definitions in our financial glossary:
| Parameter | Definition & Context |
|---|---|
| Loan Principal | The amount actually lent. The imputed-interest math runs on this figure, so a bigger loan means a bigger annual shortfall at the same rate deficit. |
| Loan Term (Years) | Sets which AFR tier applies: 3 years or less is short-term, over 3 to 9 is mid-term, beyond 9 is long-term. One year either side of a boundary can change your required rate. |
| Interest Rate Charged (%) | The rate written into your promissory note. At or above the AFR, no imputed interest exists; below it, the deficit is taxed. |
| Compounding Frequency | Annual or monthly compounding on the actual interest. The IRS publishes AFRs for each compounding period; matching your note's compounding keeps the comparison honest. |
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