What is the 2016 imputed interest rate the IRS requires on no interest loans.

[mikeburg]

I have a client who owner financed a house sale to his son for a $83,000 no interest loan to be repaid 800/month.

1 What interest rate do we have to impute on the loan?

2 Do we reduce the sales price for the interest imputed?

Thanks for your information, ideas, & opinions. They are very important to me.
mikeburg

[New York Enrolled Agent]

I have a client who owner financed a house sale to his son for a $83,000 no interest loan to be repaid 800/month.

1 What interest rate do we have to impute on the loan?

2 Do we reduce the sales price for the interest imputed?

Thanks for your information, ideas, & opinions. They are very important to me.
mikeburg

You might not have to impute interest at all given that the loan =$83,000

§7872 has 2 rules; the $10K rule and the $100K rule. Under the latter, there is no imputed interest if the son has net investment income of $1,000 or less.

[TaxGuyBill]

You can look up the rates here (I would use the month that the loan started):

https://apps.irs.gov/app/picklist/list/federalRates.html

Use the "mid-term" percentage on Table 1 (page 2).


I haven't done this before, but yes, I think you need to adjust the Sales Price to compensate for the Imputed Interest.


EDIT: I didn't see New York Enrolled Agent's post before I posted. I didn't know about the $100,000/$1,000 rule. However, it looks like your circumstance may go over the $1000.

https://www.law.cornell.edu/uscode/text/26/7872#d

EDIT AGAIN: Hmmm. I'm reading the $100,000/$1,000 rule and am confused (it is April 13th). It seems to read (as NYEA pointed out) as applying to the SON's Net Investment Interest so please ignore my prior comments, as I am not very familiar with it and my brain is too fried to think about it right now. :-)

[mikeburg]

Pretty sure son's net investment income under $1,000.

Thank you everyone, looks like son's investment income under $1,000 (pretty poor).

Strange the rule is on the borrower (the son) not the seller (the Dad).

Welcome to any other ideas.

Thank you mikeburg

[Roland Slugg]

You might not have to impute interest at all given that the loan =$83,000

§7872 has 2 rules; the $10K rule and the $100K rule. Under the latter, there is no imputed interest if the son has net investment income of $1,000 or less.

The imputed interest rules apply to two types of debt instruments: (A) Below-market loans, and (B) notes/obligations arising from deferred payment sales. The $100k exception referred to by NYEA as contained in Code §7872 (specifically §7872(d)(1)(D)) applies to below-market loans, not deferred payment obligations. The loans covered there are defined in §7872(f)(4) as follows: "The term “amount loaned” means the amount received by the borrower." When an obligation arises in connection with a deferred payment sale, such as the one described in the OP, no funds are received by the borrower.

Unstated interest on deferred payment sales is covered by Code §483, and the only de-minimis dollar exception in that code section is for a sales price that's $3,000 or less. (Code §483(d)(2)).

Accordingly, based on the facts in the OP there is "unstated interest." The AFR can be found by doing an online search for "applicable federal rates," then selecting the appropriate month from the IRS's month-by-month listing. The OP doesn't say when the transaction took place. The correct table to use is Table 1, and the correct term might be mid- or long-term, depending on how the unstated interest affects the number of payments. If it means a few additional payments at $800/month, it might make the term extend beyond 9 years, which is the M-T/L-T break point. In the middle of 2016 the M-T rate was 1.42% and the L-T rate was 2.16%. Those rates are a little higher now.