What Are Minimum-Interest Rules?

Minimum-Interest Rules Explained

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Minimum-interest rules refer to government regulations that set the lowest required federal interest rate—called the Applicable Federal Rate (AFR)—on loaned money.

Definition and Examples of Minimum-Interest Rules

Minimum-interest rules are dictated by the minimum federal rate, also known as the Applicable Federal Rate (AFR), which is published by the IRS each month. The AFR sets the lowest amount of interest that must be charged on a loan. Most lenders charge more than the AFR, so you really only see this rate when people lend money to family and friends (if they charge interest at all). AFRs tend to be significantly lower than the market rates charged by banks.

  • Alternate name: Applicable Federal Rate
  • Acronym: AFR


The AFR is set monthly by the U.S. Treasury Department. You can review the current rate on the index of Applicable Federal Rates Rulings page on the IRS website.

When a large sum of money passes hands between friends or relatives, the IRS will consider the money either a loan or a gift depending on its value and if interest is charged. Generally, the IRS looks to see minimum-interest rules applied to family loans of $10,000 or more. If the loan is less than that, you may not have to worry about tax implications.

For example, let’s say you give your adult child $15,000 to put toward a down payment on a home in August 2021. Your child has agreed to repay the money within one year, making it a short-term loan according to minimum-interest rules. You could charge your child the August 2021 AFR rate, which would make them pay 0.19% interest on the $15,000, or $28.50. Deducting the AFR from the principal, the value of the loan is now $14,971.50. The amount falls under the IRS’s annual gift tax exclusion of $15,000 in 2021 (increasing to $16,000 in 2022) so it's not considered a gift. Also, since interest was charged, it is considered a loan. If the parent gave $17,000, and did not charge interest, it would be considered a gift, and the parent may have to pay the gift tax.

How Minimum-Interest Rules Work

The minimum-interest rules rates are determined by a few different economic factors. For example, the prior 30-day average market yields of corresponding U.S. Treasury obligations (such as T-bills, treasury bills sold at discount rates that mature) are taken into account when determining the most recent AFR.


AFRs serve a few purposes under the Internal Revenue Code, such as aiding in the calculation of imputed interest on below-market loans between family members. That means if you charge an interest rate on a family loan that is less than the AFR, you will likely need to pay taxes on the difference in interest.

With family loans, particularly loans more than $10,000, the AFR represents the absolute minimum interest rate you should consider charging. By charging the correct minimum amount of interest, you can avoid unnecessary tax complications.

When it comes to family loans, three AFR tiers come into play:

  1. Short-term rates: For loans with a repayment term of up to three years
  2. Mid-term rates: For loans with a repayment term between three and nine years
  3. Long-term rates: For loans with a repayment term of more than nine years

You may also want to note the length of the loan’s agreed-upon repayment, and what the AFR is for that repayment term during the month in which you make the loan. Because AFRs change on a monthly basis, it’s best to use the AFR that is in place when the loan is established. As long as you meet or surpass that AFR, you’ll be good to go, as that rate is locked in for the life of your loan.

What It Means for Your Family

The IRS doesn’t want you making interest-free loans of substantial amounts to your family; because of this, it will tax you if you do not adhere to the minimum-interest rules.

If you choose not to charge a family member interest that is at least equal to the AFR, the IRS may tax you on the difference between the AFR and the interest rate actually charged. If the loan’s borrower uses the money to generate income (like investments or making a profit), you will need to report the interest income on your taxes, too.

Remember, loaning money to family doesn’t just involve writing a check and agreeing to a loose repayment plan. The IRS requires loans between family members to be handled a certain way. You and your family member should sign a written agreement, keep a fixed repayment schedule, and set a minimum interest rate for the loan.

Key Takeaways

  • The minimum-interest rules refer to government regulations that require a minimum federal interest rate on loaned money.
  • Published monthly by the IRS, the Applicable Federal Rate (AFR) dictates these minimum-interest rules.
  • Minimum-interest rules often come into play when lending money to family members.
  • The IRS created the minimum-interest rules to prevent you from making large interest-free loans to your family members.
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  1. Internal Revenue Service. "Applicable Federal Rates (AFR) Rulings." Accessed Dec. 5, 2021.

  2. Internal Revenue Service. "Publication 550: Investment Income and Expenses (Including Capital Gains and Losses)," Page 6. Accessed Dec. 5, 2021.

  3. Internal Revenue Service. "Applicable Federal Rates - August 2021." Accessed Dec. 5, 2021.

  4. Internal Revenue Service. "Frequently Asked Questions on Gift Taxes." Accessed Dec. 5, 2021.

  5. Internal Revenue Service. "IRS Provides Tax Inflation Adjustments for Tax Year 2022." Accessed Dec. 5, 2021.

  6. Federal Register. "Determination of Adjusted Applicable Federal Rates Under Section 1288 and the Adjusted Federal Long-Term Rate Under Section 382." Accessed Dec. 5, 2021.

  7. United States Code. "26 USC 1274: Determination of Issue Price in the Case of Certain Debt Instruments Issued for Property." Accessed Dec. 5, 2021.

  8. Internal Revenue Service. "Notice 2013-4: Adjusted Applicable Federal Rates and Adjusted Federal Long-Term Rates." Accessed Dec. 5, 2021.

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