Does the IRS require interest on owner financed real estate purchases?
Can an interest free loan be made in the case of owner financing when the parties are not related?
Hi, Dorothy. Great question!
The short answer to your question is no, the IRS does not have a requirement that you charge interest on owner-financed real estate purchase. You can actually make an interest-free loan in owner financing.
HOWEVER, and this is a big however, the IRS does have rules about loans that are made at below-market interest rates. In these instances, the IRS taxes you based on what interest income you would’ve derived if you had made the loan at a certain minimum interest rate. This is called “imputed interest.”
Thanks again for the question – it’s a very interesting topic, and definitely something for us to explore further. Be sure to check back later and see what we come up with!