when preparing to make a loan between related parties taxpayers should consider two factors to select the correct afr the length of the loan should correspond to the afrs short term three years or less mid term up to nine years and long term more than nine years 4
if the lender charges interest at a lower rate than the proper afr the irs may reassess the lender and add imputed interest to the income to reflect the afr rather than the actual amount paid by the borrower also if the loan is more than the annual gift tax exclusion it may trigger a taxable event and income taxes may be owed depending on the circumstances the irs may also assess penalties 7am i required to charge interest when loaning money to family no you re not required to charge interest however by not doing so the irs may consider your loan a gift and levy taxes accordingly 