🚀 How to Dodge The IRS’ Imputed Interest Missiles
Happy Monday!
Here is an Idea, an Action, and a Question to consider this week.
Idea
By now, you probably know how I feel about learning the lingo. To excel as an investor-agent, you have to be able to speak like an investor, and the savvy investor knows about imputed interest.
When we talk about imputed interest in real estate, we're looking at the difference between the interest stated in a private loan (like simple family loans or owner-financed real estate deals) and what the IRS thinks you should be charging based on market rates.
Yep, Big Brother's watching, and he has opinions on how you loan money.
Now, imagine you’re throwing a bone to your cousin by giving him a killer deal on a loan to purchase his first rental property. You're not charging him much interest because, hey, he's family. Uncle Sam has the ability to step in and say, “Hold on a minute! That interest rate is way too low!” If your interest rate is lower than what the IRS deems to be applicable, the difference between the rate you're offering and the standard rate might be seen as a gift in the IRS's eyes. And gifts, my friends, can be taxable.
What is the standard rate? Like most answers, it depends. If you want to avoid the IRS side-eye, get acquainted with the Applicable Federal Rates (AFR). Updated monthly, these rates tell you the minimum interest for private loans that will keep you in the clear with the taxman.
As I mentioned before, this isn't just a family affair. Real estate investors can use the concept of imputed interest to their advantage. For instance, when offering seller financing, this can be one more tool you bring out to educate the other party, bolster confidence, and win a deal.
What’s the silver lining? From what I’ve read, this concept of being taxed for interest rates being too low is rarely enforced…But how many times do you break the speed limit before you eventually get pulled over?
Important: This is not tax advice. I’m not a tax professional! Your tax professional should be your friend, though, so call him/her to get the full details on your loans.
