Seller financing without hiccups

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DEAR BENNY: We are in our late 70s and have moved out of our house. We are selling the house to our daughter for approximately $338,000 and we are taking back the mortgage. We have been told the minimal interest rate we can charge her is 1.61 percent without getting in trouble with the IRS. And, it must be renewed each year. Is this correct? Please advise. --Louise DEAR LOUISE: You are referring to what the IRS calls the "applicable federal rate" (AFR). This is the rate that is a safe-harbor. If you go below the stated rate, you will be hit with imputed interest. The IRS breaks this down into three categories: (1) short-term -- loans no longer than three years; (2) mid-term -- loans over three years but not over nine, and (3) long-term -- loans over nine years. Let me provide you with an example. The long-term rate for February 2009 was 2.96 percent. If this will be the term of your daughter's loan, you can safely lend the money to her at 2.96 percent annual inte...