What is the minimum AFR for a family mortgage loan that won't be considered a gift?

For a family mortgage loan, you'll want to use the Applicable Federal Rate (AFR) that corresponds to the term of your loan. Since a mortgage is typically long-term (more than 9 years), you'd use the long-term AFR. The regular monthly long-term AFR (1.72% in your case) is the correct rate to use, not the adjusted AFR. The adjusted AFR is used for specific income tax calculations related to certain tax-exempt obligations and other specialized situations - not for determining the minimum interest rate on family loans. If you charge less than the appropriate AFR, the IRS will consider the difference between what you charged and what you should have charged as a gift, potentially subject to gift tax reporting if it exceeds annual exclusion amounts. Make sure you properly document the loan with a written agreement including the interest rate, payment schedule, and term. Also consider recording the mortgage to ensure the interest is potentially tax-deductible for the borrower.

After struggling with a similar family loan situation last year, I found an amazing resource that saved me tons of headache and potential tax issues. I used taxr.ai (https://taxr.ai) to analyze our family loan agreement and ensure we were meeting all IRS requirements. The tool confirmed we needed to use the regular long-term AFR (not the adjusted AFR) and even provided language for our loan document. I was initially confused about the different AFR rates too, but their analysis cleared everything up and explained exactly why the adjusted AFR wasn't applicable for our situation. They also helped us understand how to properly document the loan so both parties get the tax benefits - my parents can report the interest income correctly and I can deduct the mortgage interest on my taxes.

I initially shared the same skepticism about using an online service for tax advice, but after my sister's family loan nearly resulted in an audit, I decided to try taxr.ai. Honestly, the detailed analysis they provided about AFRs was eye-opening. Not only did they confirm we needed the regular long-term AFR (1.72% in the current case), but they explained exactly why the adjusted AFR applies to entirely different tax situations. The report included IRS reference codes and publication citations that my accountant never mentioned. The best part was being able to show both parties in our family loan the same information, which prevented any disagreements. When my parents' accountant tried to suggest a different rate, we had solid documentation to refer to. Definitely worth it for the peace of mind alone.

If you're still having trouble getting through to someone at the IRS to confirm the correct AFR to use, I'd recommend trying Claimyr (https://claimyr.com). I was stuck in the same boat with conflicting advice about family loan rates, and after weeks of trying to reach the IRS directly, I found this service. They got me connected to an actual IRS representative in under 30 minutes who confirmed that for family mortgage loans, the regular monthly long-term AFR is indeed the correct rate to use. The agent explained that the adjusted AFR is primarily used for certain income tax calculations and tax-exempt obligations, not for family loans. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c - basically they navigate the IRS phone system for you and call you back when an agent is on the line. Saved me hours of frustration and hold music.

I have to admit I was completely wrong about Claimyr. After my skeptical comment last week, I decided to try it as a last resort since I still couldn't get clear answers about the AFR rates for my daughter's family loan. Not only did I get connected to an IRS representative in about 20 minutes, but the agent was incredibly helpful. They confirmed that for family mortgage loans, we need to use the regular monthly long-term AFR (not the adjusted rate). The agent explained that the adjusted AFR is specifically for calculating certain tax credits and income related to tax-exempt bonds. The representative even emailed me links to the relevant IRS publications that explain this. Saved me from potentially making a costly mistake based on conflicting advice from Google searches. Worth every penny for the time saved alone!

Just an additional tip from someone who went through this recently - make sure you document everything properly! My parents loaned me money for my house last year, and we used the correct AFR, but we didn't create proper loan documentation. This created headaches at tax time because I couldn't deduct the mortgage interest I paid to my parents without proper documentation. Also, make sure you actually make the payments as scheduled - the IRS can reclassify the loan as a gift if you're not treating it like a real loan with regular payments. We ended up having our agreement notarized and recording the mortgage with the county, which helped establish the legitimacy of our arrangement. It's worth the extra effort upfront to avoid tax issues later.

The IRS publishes the AFRs monthly in the Internal Revenue Bulletin. For April 2025, the long-term AFR is 1.72% for annual compounding, 1.71% for semiannual compounding, and 1.70% for quarterly compounding. The adjusted AFR of 1.31% isn't applicable for family loans. For reference, you can find these rates published in Revenue Ruling 2025-X (they publish a new one monthly). This is directly from the source rather than relying on potentially outdated or incorrect online information.

Great question! I went through this exact situation last year with my parents. You definitely want to use the regular monthly long-term AFR of 1.72% for a typical mortgage loan, not the adjusted AFR. The adjusted AFR is used for very specific tax calculations involving certain bonds and other specialized financial instruments - it's not meant for family loans. Your dad's accountant is correct on this one. One thing I learned the hard way is that you also need to be careful about the loan term classification. If your mortgage is truly long-term (over 9 years), then the 1.72% long-term AFR applies. But if it's shorter, you'd use the mid-term AFR instead. Also, make sure you have proper documentation in place - promissory note, payment schedule, and consider recording the mortgage with your county. The IRS will look at whether you're treating this like a real loan, not just a family arrangement. Regular payments are crucial too! You can use a rate higher than the AFR minimum if you want to be extra safe, but 1.72% is the floor to avoid gift tax issues. Good luck with your home purchase!

As someone who recently navigated this exact situation, I can confirm that your dad's accountant is absolutely correct - you need to use the regular monthly long-term AFR of 1.72%, not the adjusted AFR of 1.31%. The adjusted AFR has very specific applications related to certain tax-exempt obligations and other specialized tax calculations that don't apply to family mortgage loans. Using it for your situation would likely trigger gift tax issues since you'd be charging below the minimum required rate. A few additional considerations from my experience: 1. Make sure your loan term actually qualifies as "long-term" (over 9 years). If it's shorter, you'd need the mid-term AFR instead. 2. You can absolutely charge a higher rate than 1.72% if you want extra security - that's just the minimum. 3. The AFR you use gets locked in when you establish the loan, so you won't need to adjust it later even if future AFRs change. Don't forget about proper documentation - a written promissory note with clear terms, regular payment schedule, and consider recording the mortgage with your county. The IRS will scrutinize whether you're treating this as a legitimate loan arrangement. Good luck with your home purchase! Having family help with financing can be a great opportunity when done correctly.

Just wanted to add another perspective on the documentation side of things. When my brother and I set up a family mortgage loan last year, we made the mistake of thinking a simple promissory note would be enough. Big error! The IRS actually looks at the "substance over form" - meaning they want to see that you're treating this like a real commercial loan in every way. Beyond just using the correct AFR (1.72% long-term in your case), here's what we learned was crucial: 1. Set up automatic payments if possible - shows consistency and seriousness 2. Keep detailed records of every payment with principal/interest breakdown 3. Charge late fees if payments are missed (just like a bank would) 4. Have consequences written into the agreement for default situations We also discovered that some states require family loans to be reported differently, so definitely check your local requirements. The extra documentation work upfront saved us from potential headaches during tax season. Your situation sounds very similar to ours - using the monthly long-term AFR of 1.72% is definitely the way to go. The adjusted AFR would create gift tax problems since it's below the required minimum. Best of luck with your home purchase!

I went through this same situation about 6 months ago when helping my daughter with her first home purchase. Your dad's accountant is absolutely right - you need to use the regular monthly long-term AFR of 1.72%, not the adjusted AFR. The adjusted AFR is specifically used for certain tax calculations involving tax-exempt bonds and other specialized financial instruments that don't apply to family mortgage loans. Using the lower adjusted rate would put you below the IRS minimum threshold and could trigger gift tax reporting requirements. A few key things I learned from our experience: - The 1.72% rate gets locked in when you establish the loan and won't change even if future AFRs fluctuate - You can charge slightly higher than 1.72% if you want extra protection (we used 2.0% for simplicity) - Make sure your loan truly qualifies as "long-term" (over 9 years) - if it's shorter, you'd need the mid-term AFR instead Most importantly, treat this like a real commercial loan with proper documentation, regular payments, and clear terms. The IRS scrutinizes family loans to ensure they're legitimate debt arrangements rather than disguised gifts. We ended up recording our mortgage with the county (cost about $80) which helped establish legitimacy and allowed my daughter to claim the mortgage interest deduction. Well worth the small upfront cost for the long-term tax benefits and peace of mind!

I just went through this exact process with my son's home purchase last month, and I can confirm your dad's accountant is correct. You absolutely need to use the regular monthly long-term AFR of 1.72%, not the adjusted AFR of 1.31%. The adjusted AFR is used for very specific tax calculations related to certain tax-exempt obligations and bond calculations - it's not applicable to family mortgage loans. If you use the lower adjusted rate, the IRS will consider the difference between what you should have charged (1.72%) and what you actually charged (1.31%) as a gift, which could trigger gift tax reporting requirements. Here's what worked well for our family loan: - We used exactly 1.75% (slightly above the minimum AFR for extra safety) - Created a formal promissory note with clear payment terms - Set up automatic monthly payments to show consistency - Recorded the mortgage with our county recorder ($75 fee in our area) The recording process was straightforward - we brought a properly notarized mortgage document to the county office. This created an official record and allowed my son to claim the mortgage interest deduction on his taxes, just like with a traditional bank loan. One important note: make sure your loan term actually qualifies as long-term (over 9 years). If you're planning a shorter term, you'd need to use the mid-term AFR instead, which would be different from the 1.72% rate. The key is treating this as a legitimate commercial loan in every way - regular payments, proper documentation, and following all IRS requirements. It's been a great arrangement for our family while staying compliant with tax laws!

I'm currently in a similar situation and have been researching this extensively. Your dad's accountant is absolutely correct - you must use the regular monthly long-term AFR of 1.72%, not the adjusted AFR of 1.31%. The adjusted AFR has very specific applications in tax law, primarily for calculating imputed income on below-market loans involving tax-exempt organizations and certain bond calculations. It's not meant for standard family mortgage loans and using it would put you well below the IRS minimum threshold. A couple of additional points from my research: - The AFR is determined by the term of your loan: short-term (≤3 years), mid-term (3-9 years), or long-term (>9 years) - You can find the current rates in the monthly IRS Revenue Rulings published in the Internal Revenue Bulletin - The rate you establish at origination stays fixed for the entire loan term - You're allowed to charge above the minimum AFR if you want extra security I'd strongly recommend treating this exactly like a commercial loan with proper documentation, regular payment schedules, and recording the mortgage if possible. The IRS looks at the "substance over form" to determine if it's truly a loan versus a disguised gift. The fact that you're asking these questions upfront shows you're taking the right approach. Better to get it right from the beginning than deal with potential gift tax issues later!

I've been helping families navigate AFR requirements for several years, and I can definitively confirm that your dad's accountant is correct. You must use the regular monthly long-term AFR of 1.72%, not the adjusted AFR of 1.31%. The adjusted AFR is specifically designed for certain tax calculations involving tax-exempt bonds, original issue discount calculations, and other specialized financial instruments - it has no application for family mortgage loans. Using the adjusted rate would put you significantly below the IRS minimum threshold and create immediate gift tax implications. Here are the key points to remember: - Long-term AFR applies to loans over 9 years (1.72% for April 2025) - Mid-term AFR applies to loans 3-9 years - Short-term AFR applies to loans 3 years or less The rate you choose at loan origination is locked in for the entire term - no adjustments needed even if future AFRs change. You can absolutely use a rate higher than 1.72% for extra security (many families round up to 2% for simplicity). Most importantly, document everything properly: written promissory note, mortgage document, regular payment schedule, and consider recording with your county. The IRS evaluates whether you're treating this as a legitimate loan versus a disguised gift, so maintain commercial loan standards throughout. I've seen too many families get into trouble by cutting corners on documentation or using incorrect rates. Better to invest in proper setup now than deal with potential audit issues later!

I'm facing the exact same situation with my family and really appreciate all the detailed responses here! Just to add my experience - I initially made the mistake of trying to use online calculators to figure out the AFR, but many of them don't distinguish between the regular and adjusted rates clearly. What really helped me was going directly to the IRS website and looking up the current month's Revenue Ruling. For April 2025, it's crystal clear that the long-term AFR is 1.72% (annual compounding) for loans over 9 years, and that's definitely what you need for a typical family mortgage. The adjusted AFR that's confusing you is used for completely different tax situations - mainly involving tax-exempt bonds and certain income calculations that don't apply to family loans at all. One tip that saved me time: I called my county recorder's office before preparing any documents to ask about their specific requirements for recording mortgages. Each county has different formatting rules, and getting it wrong means delays and extra fees. In my area, they required specific margin sizes, notarization, and even had a checklist of required language. Your dad's accountant is spot-on with the 1.72% recommendation. You can go higher for safety, but that's your minimum to avoid any gift tax complications. Good luck with your home purchase - family loans can be wonderful when done right!

Your dad's accountant is absolutely correct - you need to use the regular monthly long-term AFR of 1.72% for your family mortgage loan, not the adjusted AFR of 1.31%. The adjusted AFR is used for very specific tax calculations involving certain tax-exempt obligations, original issue discount computations, and other specialized financial instruments that don't apply to family loans. Using the adjusted rate would put you below the IRS minimum threshold and could result in the difference being treated as a taxable gift. Since you mentioned this is for a house purchase, I'm assuming you're looking at a loan term longer than 9 years, which qualifies for the long-term AFR. If your loan term is actually between 3-9 years, you'd need to use the mid-term AFR instead. A few important points from someone who recently went through this process: - The 1.72% rate gets locked in when you establish the loan and won't change over time - You can charge a higher rate if you want extra security (many families round up to 2%) - Make sure you have proper written documentation - promissory note, clear payment terms, etc. - Consider recording the mortgage with your county to establish legitimacy and enable mortgage interest deduction The IRS looks at whether you're treating this as a real loan versus a disguised gift, so maintain proper documentation and make regular payments as scheduled. It's worth doing this right from the start to avoid any potential tax complications down the road.