What Is the Mid-Term Applicable Federal Rate?

The mid-term applicable federal rate is the IRS-mandated minimum interest rate for loans and other debt instruments with repayment terms longer than three years but no more than nine years. For April 2026, it is 3.82% with annual compounding, and the IRS resets the rate every month based on Treasury yields.¹ You need this rate whenever you lend money to a family member, sell property on an installment plan, or set up an estate planning trust that falls inside that three-to-nine-year window. Charging less than the mid-term AFR on a qualifying transaction can create phantom taxable interest income, unintended gift tax consequences, or both.

Where the Mid-Term Rate Sits Among the Three Tiers

The IRS publishes three AFR tiers every month, each tied to a different loan duration. The dividing lines come from federal statute: debts maturing in three years or less use the short-term rate, debts maturing in more than three but not more than nine years use the mid-term rate, and debts stretching beyond nine years use the long-term rate.² Each rate reflects the average market yield on Treasury securities with matching maturities during a sampling period the IRS selects.

The mid-term tier covers the transactions most people actually encounter: a five-year loan to help a child start a business, a seven-year seller-financed property sale, or a trust designed to move wealth over a six-year term. When a note isn’t clean, the full term controls. A four-year loan with an option to extend to twelve years, for example, may be treated as a longer-term instrument because the IRS accounts for renewal and extension options when measuring the term.³

Private Loans Between Family Members and Related Parties

The most common reason to care about the mid-term AFR is a loan between related parties: parent to child, sibling to sibling, employer to employee, corporation to shareholder. Under federal tax law, any loan that charges interest below the applicable AFR is a “below-market loan,” and the IRS treats the missing interest as though it was actually paid.⁴ The lender owes income tax on interest never collected, and the borrower is treated as having received a gift or additional compensation equal to the shortfall.

Say you lend your daughter $150,000 at 1% for five years to help with a down payment. Because the term is over three years but not more than nine, the mid-term AFR is the benchmark. If the mid-term AFR that month is 3.82%, the IRS imputes the difference between 1% and 3.82% as income to you and as a gift from you to her. That phantom income lands on your tax return even though no extra cash changed hands.

A loan structured at or above the mid-term AFR avoids the problem. The IRS respects it as a genuine debt transaction, and you report only the interest you actually receive.

Term Loans vs. Demand Loans

This distinction trips people up more than almost anything else in the AFR world. A term loan has a fixed maturity date written into the promissory note. A demand loan is payable whenever the lender asks for repayment, with no set end date. The IRS also treats loans with indefinite maturities as demand loans.⁵

The mid-term AFR only applies to term loans that mature between three and nine years out. Demand loans always use the short-term AFR, regardless of how long the borrower actually keeps the money. A demand loan outstanding for seven years still gets tested against the short-term rate each period.⁵ If you want mid-term treatment, you need a written loan agreement with a fixed repayment date inside that window.

There’s another timing difference worth knowing. For term loans, the AFR is locked on the day the loan is made. If the mid-term AFR is 3.82% when you sign the note, that rate governs the entire loan even if rates climb later. Demand loans float with the short-term rate each period.

Picking a Compounding Frequency

Each monthly revenue ruling publishes four versions of every AFR based on compounding frequency: annual, semi-annual, quarterly, and monthly. The more frequently interest compounds, the slightly lower the stated rate. For April 2026, the mid-term AFR ranges from 3.82% with annual compounding down to 3.75% with monthly compounding.¹ Monthly compounding gives you the lowest stated rate that still meets the AFR floor, so most private loans use that option.

When Small Loans Are Exempt

Not every below-market loan triggers imputed interest. The tax code carves out two safe harbors based on loan size.

The $10,000 Exception

If the total outstanding loans between you and another individual stay at or below $10,000 on every day of the year, the imputed interest rules don’t apply. The same threshold covers employer-employee loans and corporation-shareholder loans.⁵ One catch: the exception disappears if the borrower uses the proceeds to buy or carry income-producing assets like stocks or rental property. In that case, even a $5,000 interest-free loan gets scrutinized.

The $100,000 Cap on Imputed Interest

For gift loans between individuals where the total outstanding balance stays at or below $100,000, the imputed interest the IRS can tax is capped at the borrower’s net investment income for the year. If the borrower’s net investment income is under $1,000, it’s treated as zero, effectively eliminating any imputed interest.⁵ This helps parents who lend moderate amounts to adult children without significant investment portfolios. Once the balance crosses $100,000 on any day of the year, the cap disappears and the full imputed interest rules apply.

Seller-Financed Property Sales

When you sell property and let the buyer pay over time, the IRS wants to see part of each payment treated as interest rather than hidden in the purchase price. If total payments on a seller-financed sale exceed $250,000 and the stated interest rate is below the applicable AFR, the IRS recharacterizes a portion of the payments as interest income to the seller.³ For a sale with a five- or seven-year repayment schedule, the mid-term AFR is the minimum.

Sales at or below $250,000 in total consideration are exempt, as are sales of a principal residence and publicly traded debt instruments.³

There’s a helpful wrinkle for sellers. The applicable rate isn’t necessarily the AFR in effect the month the deal closes. The statute uses the lowest AFR from the three-month period ending with the first month a binding written contract exists.² In a declining rate environment, that lookback can save the seller from using a higher rate. If you’re timing a property sale, check this before you sign.

The Section 7520 Rate and Estate Planning

The mid-term AFR feeds directly into one of the most important numbers in estate planning: the Section 7520 rate. This rate, used to value annuities, life estates, and remainder interests, equals 120% of the annual mid-term AFR rounded to the nearest two-tenths of a percent.⁶ For April 2026, the Section 7520 rate is 4.6%.⁷

The Section 7520 rate matters for Grantor Retained Annuity Trusts (GRATs) and Charitable Remainder Trusts (CRTs). A GRAT transfers assets into a trust while the grantor retains annuity payments for a set term. The lower the Section 7520 rate, the smaller the taxable gift is deemed to be, and the more wealth can pass to beneficiaries free of gift tax. When the mid-term AFR drops, estate planners pay close attention.

For charitable contributions involving a life estate or remainder interest, the taxpayer can choose among three months for the valuation: the month the transfer occurs or either of the two preceding months.⁶ When rates have been volatile, the difference between adjacent months can shift a charitable deduction by thousands of dollars.

What Happens If You Charge Less Than the AFR

Failing to charge the correct AFR doesn’t just create phantom income. The consequences cascade.

The lender must report imputed interest as taxable income even though nothing was received. On a $200,000 five-year loan charged at 0% when the mid-term AFR is 3.82%, that’s roughly $7,600 in imputed interest in the first year alone. The forgone interest is also treated as a transfer from lender to borrower. For family loans, that transfer is a gift. If total gifts to that person for the year exceed the annual exclusion of $19,000, the lender needs to file a gift tax return.⁸ The $15,000,000 lifetime exemption means most people won’t owe actual gift tax, but failing to file the return is itself a compliance problem.⁹

If the IRS finds unreported imputed interest during an audit, accuracy-related penalties apply at 20% of the underpayment, doubling to 40% for a gross valuation misstatement, plus interest on the underpayment from the original due date.¹⁰

For employer-employee loans, the stakes shift. Imputed interest becomes compensation rather than a gift, so payroll tax rules apply to both sides.

Documenting a Loan at the Mid-Term Rate

Structuring the interest rate correctly is only half the battle. The IRS can reclassify a loan as an outright gift if it doesn’t look like a real debt transaction. A defensible intra-family loan needs a signed promissory note, a fixed repayment schedule, and a stated interest rate at or above the applicable AFR. Without those elements, the entire principal amount could be treated as a taxable gift.

The promissory note should specify the loan amount, the interest rate, the compounding method, the payment dates, and the maturity date. The maturity date is especially important because it determines which AFR tier applies. A note that says “payable when convenient” has no fixed term, which pushes the loan into demand-loan territory and the short-term rate. If you specifically want mid-term treatment, the note must commit to a maturity date between three and nine years out.

Actual repayment behavior matters too. If the borrower never makes a payment and the lender never asks for one, the IRS will argue the arrangement was a gift from the start, regardless of what the paperwork says. Keep records of every payment received, even if it’s an electronic transfer between family bank accounts. If the borrower can’t make a scheduled payment, document the modification in writing rather than silently letting it slide.

Finding This Month’s Rate

The IRS publishes new AFR rates in a revenue ruling near the end of each month, effective for the following month. For April 2026, the mid-term rates are:¹

Annual compounding: 3.82%
Semi-annual compounding: 3.78%
Quarterly compounding: 3.76%
Monthly compounding: 3.75%

Each revenue ruling is organized into numbered tables. Table 1, “Applicable Federal Rates (AFR),” contains the short-term, mid-term, and long-term rates broken out by compounding frequency. The mid-term row is what you need for any loan or transaction with a term longer than three years and not more than nine. Revenue rulings are published as PDFs on irs.gov and are searchable by ruling number.

Because rates change monthly and the rate on a term loan is locked at origination, the month you fund the loan matters. If rates are trending upward, closing a week earlier to capture the current month’s lower rate is a legitimate strategy. For installment sales, the three-month lookback gives you additional room to pull in a favorable rate from a recent low point.

1
IRS. Rev. Rul. 2026-7
2
Office of the Law Revision Counsel. 26 USC 1274 – Determination of Issue Price in the Case of Certain Debt Instruments
3
Office of the Law Revision Counsel. 26 USC 1274 – Determination of Issue Price in the Case of Certain Debt Instruments
4
Office of the Law Revision Counsel. 26 USC 7872 – Treatment of Loans With Below-Market Interest Rates
5
Office of the Law Revision Counsel. 26 US Code 7872 – Treatment of Loans With Below-Market Interest Rates
6
Office of the Law Revision Counsel. 26 USC 7520 – Valuation Tables
7
IRS. Section 7520 Interest Rates
8
IRS. IRS Releases Tax Inflation Adjustments for Tax Year 2026
9
IRS. Whats New — Estate and Gift Tax
10
Office of the Law Revision Counsel. 26 US Code 6662 – Imposition of Accuracy-Related Penalty on Underpayments