What a Below-Market-Demand Loan Costs You in 2011

If you lend money and fail to charge interest at a rate at least equal to the applicable federal rate (AFR) for the term of the loan, you may be subject to below-market loan rules. These rules require the lender to report phantom (“imputed”) interest-the amount of interest that should have been charged but was not.

If the loan is a demand loan that is outstanding for all of 2011 and the loan balance does not fluctuate, a so-called “blended rate” fixed by the IRS applies. The IRS recently announced the blended rate for 2011: 0.40%, which is even lower than the blended rate of 0.59% last year.

Exception: If you make certain gift loans (e.g., a loan to a relative below $10,000, or below $100,000 in some cases), there is no imputed interest.

Source: Rev. Rul. 2011-14