Below-market Loan

About Below-market Loan:

Also called Below-market-rate loans. A loan that provides for no interest or for interest at less than the statutory federal rate (applicable federal rate, AFR). Such loans are generally recharacterized using the AFR, which will cause the lender to have constructive income to the extent of any imputed interest. That is, the difference between the rate the federal government pays on new borrowings and the interest charged on the loan. The borrower will similarly be deemed to have received a gift, compensation, dividend, or other payment that is deemed to be transferred to the lender as payment of interest. See Former IRC (check if this IRC provision is current here) §7872(e)(l).

If the taxpayer make an interest-free or bargain-rate loan to a friend or relative – or anyone else – the taxpayer may be required to include in his or her taxable income some of the interest the IRS believes the taxpayer should have charged.

See Dividend in the American Legal Encyclopedia and Dividend in the World Legal Encyclopedia.