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How low can your loan go?

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in Small Business Tax

Generally, the tricky below-market loan rules and the related imputed interest rules do not apply to an intrafamily loan so long as you charge an interest rate equal to the Applicable Federal Rate (AFR) in the month the loan is made.

Frequently, the loan will be structured so your child or other relative makes monthly interest payments with a principal balloon payment at the end.

The IRS treats loans as either short-term loans (loans three years or less), mid-term loans (loans more than three years but not more than nine years) and long-term loans (loans more than nine years). Following are the AFR rates so far in 2008 for each loan category:

Month in 2008                            Short-Term                        Mid-Term                            Long-Term

June                                                2.08%                                  3.20%                                       4.46%

May                           ...(register to read more)

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