The law requires a minimum rate of interest to be charged on loan transactions unless a specific exception covers the transaction. Where minimum interest is not charged, the law imputes interest as if the parties agreed to the charge.
The rules are complicated and have been subject to several revisions. There are different minimum interest rates and reporting rules depending on the nature of the transaction. The following discussion provides the important details for understanding the rules. For specific cases and computations, we suggest that you consult IRS regulations for details not covered in this book.
There are two broad classes of transactions:
These are generally covered by Internal Revenue Code Section 7872. Below-market or low-rate interest loans are discussed in 4.31.
These are covered by either Internal Revenue Code Section 1274 or Section 483. Seller-financed sales are discussed in 4.32. If parties fail to charge the minimum required interest rate, the same minimum rate is imputed by law.
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