MARK KOHLERMain Street Professionals, Main Street Professionals, Main Street Professionals, Main Street Professionals, Main Street Professionals, LLC · Owner at Main Street Professionals, LLC

How To Avoid Phantom Interest On Your Loan #taxtips #business #irs

26 Aug 2026 · 1 min

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Mark Kohler explains how the IRS can impute interest on below-market loans over $250,000 under Section 1274, especially in seller-financed deals. The IRS has authority to do this when loan rates deviate from fair market value, though enforcement depends on specific facts. Practitioners need to evaluate each loan's circumstances to assess IRS imputation risk.

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The IRS cannot impute interest on below-market interest loans. My understanding is that for seller financing over $250K, the IRS can impute interest if the rate is below market under Section 1274. What say you?
The IRS can impute interest in certain instances when interest should have been fair market value. And this can be a deal with third-party lenders, borrowers, it could be family members, but it's very case-driven. And so I have to be careful. That's the law, but can you get around it? Is there an exception? For almost every law out there's some workaround. But I will say, I do agree that the IRS can do that. The issue is, will they do it and in what instances? Pace was here to talk about that. He'd go, well, in this instance, the IRS can't do it. But in another instance, the IRS very well may. So we have to look at kind of the fact pattern there. But you got to know what you're doing and what the exposure is.