Timing AFR-Sensitive Transactions Before October 31, 2026

The IRS released the November 2026 applicable federal rates (AFRs), [MF1.1] which are higher than October’s. Accordingly, any client planning an intrafamily loan, an installment sale to a grantor trust or a seller-financed sale has only a few days left to lock in October’s lower rates.

Current Rate Change

As published under IRC §1274(d), October 2026 (Rev. Rul. 2026-19) and November 2026 (Rev. Rul. 2026-21) are published as follows:

Transactions Affected by the Increase

Intrafamily Term Loans

A term gift loan avoids being a below-market loan under IRC §7872 only if it charges at least the applicable federal rate or AFR. The AFR that applies is dependent upon the loan term established when the loan is executed. The short-, mid- or long-term rate remains fixed for the whole term and since the value of the interest arrangement is set at inception, the AFR is not recomputed each year.

Example: a $1,000,000 nine-year interest-only note signed in October with a mid-term rate of 4.61% requires $46,100 of annual interest. Similarly, the same note signed in November at 5.08% requires $50,800. Over the note’s term, that is $42,300 in additional interest.

For this to work, the note must be signed and funded in October. A loan documented in October but funded in November risks being treated as made in November.

Demand loans are much less affected by the timing. Interest on demand loans is calculated using the short-term rate for each semiannual period, so the rate floats over the life of the loan.

Rising rates also end the refinancing option. When rates fall, existing loans are replaced with a new note at the lower current AFR. In today’s market, notes already in place at lower rates should not be refinanced.

Installment Sales to Intentionally Defective Grantor Trusts (IDGTs)

The note in an IDGT sale carries interest at the §1274 AFR, chosen by the note’s term. Commentators warn against relying on the §1274(d)(2) three-month lookback for an IDGT sale, because the transfer is deliberately not a sale for income tax purposes. The conservative approach is to use the §7872 rate for the month of the sale. To use October’s rate, the sale should close in October.

Seller-Financed Sales of Property

For a sale or exchange, including installment sales, the “lowest 3-month rate” is utilized. This is represented using the lowest AFR in effect during the three calendar months ending with the first month in which there is a binding written contract. The rate stays fixed even if the sale closes later. A buyer and seller who sign a binding written contract by October 31 can carry the October-or-earlier rate into a closing in November or later.

Quick Reference

Practical Takeaways

Rate arbitrage should never drive a transaction that does not otherwise make sense. Valuations, appraisals, note documentation and closing logistics can all take longer than five days. For clients whose plans are already substantially in place, though, the October-versus-November choice can measurably change interest cost. Client service teams should review pending matters now and confirm that each transaction is signed, funded or closed in the intended month.