Seller Financing Imputed Interest Calculator
When a seller finances a home sale below market interest rates, the IRS may impute interest under IRC §1274 (debt instruments) or §483 (installment sales). Difference between stated rate and Applicable Federal Rate (AFR) is treated as interest income to seller and interest deduction to buyer — regardless of what's stated in the contract.
How AFR and Imputed Interest Work
IRS publishes Applicable Federal Rates monthly (short-term ≤3yr, mid-term 3-9yr, long-term >9yr) at applicable-federal-rates.com or in Rev. Rul. notices. Any seller-financed transaction with stated rate below AFR triggers imputation under IRC §1274 (purchase money over $250K) or §483 (other installment sales). IRS treats the loan AS IF interest were at AFR for income/deduction purposes.
Why Sellers Should Care
Sellers report imputed interest as ordinary income on Schedule B each year, even though they don't receive that cash. Buyers can deduct imputed interest as mortgage interest IF property is qualified residence and they itemize. Net effect: tax bill for seller without offsetting cash. Always set stated rate at or above AFR to eliminate imputation entirely.
Seller-Financing Tax Strategy
Three best practices: (1) Always match stated rate to AFR mid-term published the month of closing. (2) Use installment method (IRC §453) to spread capital gain over loan term — significant tax deferral. (3) Have buyer pay points (deductible to buyer, taxable as ordinary income to seller in year received). Coordinate with CPA before closing — wrong structure can trigger 6-figure tax surprise.
Source: IRS Revenue Ruling AFR tables (monthly), IRC §1274, §483, §453 (installment method). Last updated: May 2026.