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Applicable Federal Rate (AFR): Rates, Tables and How to Use Them

By Hans Goldstein · Updated 2026-09-27

The applicable federal rate (AFR) is the minimum interest rate the IRS publishes each month under IRC §1274(d). It comes in three terms: short-term (3 years or less), mid-term (over 3 and up to 9 years) and long-term (over 9 years). If a seller-financed note or a family loan charges less than the AFR for its term, the tax law treats part of the payments, or the missing interest, as interest anyway.

For October 2026, Rev. Rul. 2026-19 sets the annual AFRs at 4.25% short-term, 4.61% mid-term and 5.22% long-term. The rates change every month, so always pull the ruling for the month that matters to you from the IRS AFR index.

What the AFR is (and what it is not)

The AFR is a tax benchmark. It is based on the average market yield on outstanding U.S. government debt of similar maturities (§1274(d)(1)(C)), and the IRS publishes it as a revenue ruling shortly before the month begins. It is used by dozens of Code sections; Rev. Rul. 2026-19 lists §§42, 280G, 382, 467, 468, 482, 483, 1274, 1288, 7520, 7702 and 7872.

It is not a market rate. No bank will lend you money at the AFR, and a buyer who could borrow at the AFR from a bank would not need seller financing. For a seller, the AFR is a floor for tax purposes. The rate you actually negotiate on a note depends on the buyer, the down payment, the collateral and the term, which we cover in how to set a seller financing interest rate.

October 2026 AFR table (Rev. Rul. 2026-19)

This is Table 1 of Rev. Rul. 2026-19, the base AFR rows. The four columns are the same rate expressed for different compounding periods.

The same ruling also sets the §7520 rate at 5.60% for October 2026 (Table 5). For comparison, Rev. Rul. 2026-12 set the July 2026 annual AFRs at 4.00%, 4.35% and 4.98%, and set the 2026 blended annual rate at 3.82% (Table 6). Rates moved up about a quarter point between July and October 2026.

These figures go stale quickly. Treat this table as an example of how to read the ruling, not as the rate for your deal.

How to read the AFR table

Each monthly ruling has five or six tables. A seller or family lender usually needs only two of them.

Table 1: the AFRs. Three blocks (short, mid, long), four compounding columns, and extra rows at 110%, 120%, 130% (and for mid-term, 150% and 175%) of the base rate.

• Pick the row by term. The base "AFR" row is the one for installment notes and most family loans. The multiples serve other Code sections. For example, §1274(e) uses 110% of the AFR for certain sale-leasebacks, and the §7520 rate is 120% of the mid-term rate, rounded to the nearest 0.2% (§7520(a)(2)).
• Pick the column by how your note compounds. A note that pays interest monthly is compared to the monthly column, a note that pays annually to the annual column. The IRS test for a seller-financed note is stated with semiannual compounding (§1274(b)(2)(B)), which is why most advisors quote the semiannual figure. The four columns are mathematically equivalent, so the choice only matters if you are close to the line.

Table 5: the §7520 rate. Used to value annuities, life estates, remainders and similar split interests: charitable remainder trusts, GRATs, private annuities and the like.

Blended annual rate. Published once a year (in the July ruling). It is used for demand loans that are outstanding for the whole calendar year under §7872.

Short-term, mid-term or long-term: which applies?

The term decides the row (§1274(d)(1)):

For an installment sale note, "term" means the note's weighted average maturity, not its final due date (IRS Pub. 537, citing Reg. §1.1273-1(e)(3)). A 15-year amortizing note pays principal every month, so its weighted average maturity is much shorter than 15 years and it may fall in the mid-term bucket. A note with interest only and a single balloon at year 12 has a weighted average maturity close to 12 years and uses the long-term rate.

For a family term loan, use the rate for the loan's stated term in effect on the day the loan is made (§7872(f)(2)(A)).

Which month's AFR?

This is where sellers and lenders leave money on the table.

• Installment sales. The test rate is the lowest AFR in effect during the 3-calendar-month period ending with the first month in which there is a binding written contract. Pub. 537 adds that you may instead use the 3-month period ending with the month of the sale, if lower. In a rising-rate year, signing the contract early locks in a lower floor.
• Term loans to family. The AFR in effect when the loan is made, compounded semiannually, and it stays fixed for the life of the loan (§7872(f)(2)(A)).
• Demand loans. The short-term AFR for each period the loan is outstanding, so the floor floats (§7872(f)(2)(B)). For a demand loan outstanding all year, the blended annual rate (3.82% for 2026) is a shortcut.

Where the AFR shows up for sellers and families

For large seller-financed sales, the test rate cannot exceed 9%, compounded semiannually, for seller financing up to an inflation-adjusted amount (§1274A). Pub. 537 lists that amount as $7,296,700 for 2025. It only matters when the AFR itself is above 9%.

Family loans and the AFR (IRC 7872)

Intrafamily loans are the second most common reason people search for AFR rates. The rules are in §7872, and they differ from the installment sale rules.

What happens if you charge less than the AFR. For a gift loan, the "forgone interest" (the AFR interest minus the interest actually charged) is treated as if you transferred it to the borrower as a gift and the borrower paid it back to you as interest (§7872(a)(1)). You report interest income you never received, and you may have a gift to report.

Two important exceptions for loans between individuals:

• $10,000 de minimis. §7872 does not apply on any day the total outstanding loans between the two individuals are $10,000 or less, unless the loan is used to buy or carry income-producing assets (§7872(c)(2)).
• $100,000 net investment income cap. If the total loans between the two individuals are $100,000 or less, the interest you are deemed to receive for income tax purposes cannot exceed the borrower's net investment income for the year, and if that is $1,000 or less it is treated as zero (§7872(d)(1)). This does not apply if tax avoidance is a principal purpose.

The practical answer. Most families avoid all of this by charging at least the AFR for the loan's term, putting it in a signed note, and actually collecting the payments. At October 2026 rates, a 10-year family loan at the long-term AFR would carry about 5.22% (annual compounding), well below most bank rates.

Simple example: locking the AFR on a seller-financed note

Simple example. Assumptions: a seller signs a binding contract in October 2026 to sell a rental for $900,000 with $180,000 down and a $720,000 note. The note pays interest monthly and amortizes over 20 years with a balloon in year 7, so its weighted average maturity falls between 3 and 9 years.

1. Term bucket: mid-term.
2. Compounding: monthly payments, so compare to the monthly column: 4.52% in October 2026.
3. Window: the test rate is the lowest mid-term monthly AFR in August, September and October 2026 (or the 3 months ending with the closing month, if lower). Pull each ruling and take the lowest.
4. Any stated rate at or above that figure passes the test. Charging, say, 7% leaves plenty of room, and the rate you negotiate above the floor is a business decision.

If the note instead charged 3%, part of every principal payment would be recharacterized as interest, lowering the capital gain and raising ordinary income. Run your own price, down payment and rate through the calculator to see what a given rate does to your payments.

Bottom line

The applicable federal rate is the IRS's monthly minimum rate, split into short, mid and long terms. For a seller-financed note, charge at least the AFR for the note's weighted average maturity, using the lowest rate in the 3-month window around your contract. For a family loan, charge at least the AFR for the loan's term on the day you make it, or understand the §7872 consequences. Always pull the current ruling from irs.gov instead of trusting a rate quoted anywhere else, including here.

For how the note itself should be written, see seller financing note terms, and for a full payment schedule, how seller financing works.

Questions to ask your CPA

• What is the weighted average maturity of my note, and does it fall in the short, mid or long-term bucket?
• Which month's AFR can we use, given the contract date and the closing date?
• Does §483 or §1274 apply to my sale, and does the 9% cap or the 6% related-party land cap matter?
• For a family loan, is it a term loan or a demand loan, and do the $10,000 or $100,000 exceptions apply?
• If we forgive payments later, how are the gift and income tax consequences handled?

Educational only, not tax, legal or investment advice. Examples are illustrative. Have your CPA or tax attorney review your facts before you act. Hans Goldstein is a licensed insurance agent (CA Insurance License #4273294) and is not a CPA or attorney. He is paid a commission only if a structured installment sale is funded; seller financing pays him nothing. Disclosures.