Minimum interest on Seller Note

searcher profile

November 06, 2023

by a searcher from University of Pennsylvania - The Wharton School in Chicago, IL, USA

Hi All,

I have a deal under LOI, and the Seller recently proposed a 0% interest Seller Note (to offset some other unanticipated costs). Does anyone have information on the tax implications of this, if any? I'm not sure if there is a minimum interest rate required on the Seller Note.

Thanks!

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commentor profile
Reply by a searcher
from Harvard University in New York, NY, USA
Why not just lower the seller note dollar amount, and slap on an interest rate to make the applicable payments the same? Like, idk, just an example, 500k Seller's Note @ 0% interest over 5 years is same monthly payments as 400k seller's note @ 8% over 5 years. I would imagine this is better for both you and the seller. The seller has a lower day 1 sales price, and effectively spreads the rest of his gains over the next 5 years via interest. Assuming he is retiring so something, it's tax advantageous. Similarly for you, by paying interest, you can write off your interest expense as a deduction w/o any additional outlay in cash. The only drawback is you lower your initial basis so you will have a bigger capital gains in the future but hey, you would always rather have more money today than deferred am i right.
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Reply by a professional
from Boston College in Baltimore, MD, USA
With a zero percent loan, the IRS may (will likely) impute interest to the seller-lender at the applicable AFR rate, so typically a buyer-friendly sellers note still carries interest at the AFR rate. It's most often a seller-lender concern and not your issue as buyer (other than from an economic standpoint), but, in some cases, the borrower-company-buyer may also be required to report the imputed interest and pay taxes on it, depending on the specific circumstances of the loan, so -- while definitely the exception rather than the rule -- best to get targeted advice from your tax advisor.
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