The current Applicable Federal Rate (AFR) is the minimum interest rate set by the IRS each month for private loans including those between family members or certain financial transactions to prevent tax avoidance. These rates vary based on the length of the loan and the compounding frequency. For July 2025, the IRS the obligee issuing the rate information has released new AFR tables that benefit lenders, borrowers, estate planners, and accountants.
What Are Applicable Federal Rates?
Definition and Purpose
Applicable Federal Rates are published monthly by the IRS according to IRC Section 1274(d). The AFR establishes minimum interest that must be charged on private loans to prevent below-market-rate arrangements from being treated as gifts, which would trigger taxable imputed interest.
Categories and Compounding Options
AFRs are divided by loan duration:
- Shortterm: up to 3 years
- Midterm: more than 3 and up to 9 years
- Longterm: over 9 years
Each category is published with annual, semiannual, quarterly, and monthly compounding options. There’s also a blended annual rate for demand loans without fixed terms.
July 2025 AFR Details
ShortTerm AFR (up to 3 years)
July 2025 shortterm rates are:
- Annual compounding: 4.12%
- Semiannual: 4.08%
- Quarterly: 4.06%
- Monthly: 4.05%
Thus if you lend $10,000 for one year, the minimum safe interest is 4.12%, or about $412 interest.
MidTerm AFR (39 years)
- Annual: 4.19%
- Semiannual: 4.15%
- Quarterly: 4.13%
- Monthly: 4.11%
These rates guide loans structured for medium-term fiscal planning.
LongTerm AFR (over 9 years)
- Annual: 4.90%
- Semiannual: 4.84%
- Quarterly: 4.81%
- Monthly: 4.79%
Used for long-term transfers, installment sales, or intra-family loans exceeding nine years.
Blended Annual Rate for Demand Loans
For loans with no set maturity date but outstanding for at least a year, the blended annual AFR is 4.22% for 2025.
Section 7520 Rate
The Section 7520 rate, used for valuing annuities, life estates, remainder interests, and trusts, is 5.00% for July 2025.
Why AFR Matters
Avoiding Taxable Gifts
If a loan to a family member carries interest below the AFR, the IRS may impute interest using AFR rates. This imputed amount is treated as a gift from the lender to the borrower and can trigger gift taxes.
Funding Estates and Trusts
Properly using AFR prevents undervaluing intra-family gifts or shifts in estate planning. Tools like Grantor Retained Annuity Trusts (GRATs) or charitable annuity trusts depend on these rates. The Section 7520 rate directly affects calculations for life interest arrangements.
Pricing Loans Legally
AFRs help structure legitimate loans between related parties parent-child, siblings, or trusts without triggering IRS penalties. Using AFR ensures loans are treated as bona fide debt rather than taxable gifts.
How to Use Current AFR
Referencing the IRS Revenue Ruling
The IRS issues monthly publications like Rev. Rul. 202513 for July AFRs. They include full tables for all compounding types.
Selecting the Right Rate
- Loan term â¤3 years â Shortterm AFR
- Term >3 but â¤9 years â Midterm AFR
- Term >9 years â Longterm AFR
- Demand loan â¥1 year â Blended annual rate
Calculating Interest
Apply the chosen compounding method. For example, at 4.12% annual, a $10,000 loan accumulates $412 interest in a year. If compounding monthly (4.05%), the interest will be slightly more due to compounding.
Staying Compliant and Avoiding Pitfalls
Monthly Updates and Rate Locks
AFR changes monthly, so apply the rate for the month the loan is made. Once set, a fixed-rate loan uses that rate for its duration.
Correct Documentation
Draft a proper written agreement specifying principal, term, interest, and compounding method. Ensure it mirrors AFR requirements. Certified advice is recommended for non-standard transactions.
Consult Professionals
If structuring trusts, refinancing intra-family assets, or creating installment sales, consulting tax advisors or estate attorneys ensures accurate application of AFR and compliance with complex IRS rules.
The current AFR for July 2025 provides essential interest benchmarks for private loans, intra-family financing, and estate and trust management. Shortterm, midterm, and longterm annual rates are 4.12%, 4.19%, and 4.90% respectively, with a blended annual rate of 4.22%. The Section 7520 rate is 5.00%. Using these rates correctly helps you avoid unintended taxable gifts, ensures compliance with IRS standards, and facilitates lawful financial arrangements. Checking IRS monthly rulings and consulting advisors keeps your financial planning aligned with current regulations.
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