Understanding the Applicable Federal Rates (AFRs) for February 2025

The Applicable Federal Rate (AFR) is a set of interest rates published monthly by the Internal Revenue Service (IRS). These rates are used to determine minimum interest rates for private loans, tax calculations, and valuations of financial instruments under federal tax law.

The IRS requires that any loan, even between family members or businesses, must charge at least the AFR to avoid tax consequences such as imputed interest—where the IRS treats the lender as if they received interest income, even if no interest was charged.

AFRs are commonly used for:

• Below-Market Loans – Ensuring that personal, family, or business loans meet minimum interest requirements.

• Installment Sales – Calculating interest for seller-financed transactions.

• Estate and Gift Tax Planning – Valuing annuities, trusts, and other financial instruments.

• Charitable Contributions – Determining deductions for certain types of donations.

February 2025 AFRs Overview

Each month, the IRS categorizes AFRs based on loan duration:

• Short-term – Loans with a term of 3 years or less

• Mid-term – Loans with a term of over 3 years and up to 9 years

• Long-term – Loans with a term of over 9 years

Additionally, the IRS provides rates based on different compounding periods: Annual, Semiannual, Quarterly, and Monthly.

AFRs for February 2025 (Revenue Ruling 2025-5)

Term	Annual	Semiannual	Quarterly	Monthly
Short-term	4.34%	4.29%	4.27%	4.25%
Mid-term	4.52%	4.47%	4.45%	4.43%
Long-term	4.86%	4.80%	4.77%	4.75%

Adjusted AFRs for Tax-Exempt Obligations

For tax-exempt instruments, the IRS provides adjusted AFRs, which are lower than standard AFRs due to the tax-exempt status of the interest received.

Term	Annual	Semiannual	Quarterly	Monthly
Short-term	3.29%	3.26%	3.25%	3.24%
Mid-term	3.42%	3.39%	3.38%	3.37%
Long-term	3.67%	3.64%	3.62%	3.61%

Section 7520 Rate for February 2025

The Section 7520 rate is used to calculate the present value of annuities, life estates, and remainder interests for estate and gift tax purposes.

For February 2025, the Section 7520 rate is 3.67%.

This rate is particularly important for estate planners and those structuring charitable remainder trusts, grantor retained annuity trusts (GRATs), and other financial instruments.

How AFRs Impact Tax Planning

Using the correct AFR ensures compliance with IRS rules and prevents unintended tax consequences. Key considerations include:

• Avoiding Imputed Interest – If a loan’s interest rate is below the AFR, the IRS may impute interest, meaning the lender could owe taxes on income they never actually received.

• Structuring Loans Efficiently – For business loans, personal loans, and seller-financed transactions, using the right AFR can help minimize tax liability.

• Estate Planning Advantages – In GRATs and other estate strategies, a lower Section 7520 rate can enhance the tax efficiency of wealth transfers.

Conclusion

The IRS AFRs and Section 7520 rates play a vital role in tax planning, estate structuring, and loan agreements. For February 2025, the rates reflect current economic conditions and provide a framework for setting interest rates on private loans, installment sales, and financial transactions.

Understanding these rates—and applying them correctly—can help taxpayers, estate planners, and businesses avoid IRS penalties and optimize their tax strategies.

For personalized tax guidance and compliance assistance, Bizora is here to help you navigate the latest IRS updates and regulatory changes.