J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

4.30 Minimum Interest Rules

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:

Loans.

These are generally covered by Internal Revenue Code Section 7872. Below-market or low-rate interest loans are discussed in 4.31.

Seller-financed sales of property.

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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Filing Instruction

Tax Return Statement Requirements

A lender reporting imputed interest income or a borrower claiming an interest deduction must attach statements to their income tax returns reporting the interest, how it was calculated, and the names of the parties and their tax identification ...