Updated August 3, 2026. Quick answer: it is not an exemption for loans under $100,000, and that is the most common misunderstanding about it. It is a cap tied to the borrower’s investment income — and where that income is $1,000 or less, the cap is zero.
What the provision actually says
“the amount treated as retransferred by the borrower to the lender as of the close of any year shall not exceed the borrower’s net investment income for such year.”
This does NOT exempt loans up to $100,000 from imputation. It CAPS the imputed interest at the borrower’s net investment income for the year. The $100,000 figure is the aggregate-outstanding ceiling above which the cap stops applying at all.
And then the sentence that resolves most family loans
If the net investment income of any borrower for any year does not exceed $1,000, the net investment income of such borrower for such year shall be treated as zero.
Where the borrower’s net investment income for the year is $1,000 or less, the cap becomes ZERO – so no forgone interest is imputed to either party for that year at all. Not merely capped low: nothing.
What this means in practice
| Borrower’s net investment income | Imputed to either party |
|---|---|
| $1,000 or less | Nothing — treated as zero |
| More than $1,000 | Capped at that income, not at the full forgone interest |
Think about who borrows money from a parent. Somebody buying a first home, clearing higher-rate debt, or getting through a bad year. That person typically does not have meaningful investment income, so for a loan within the ceiling the answer is commonly that nothing happens at all.
The person for whom this does bite is a borrower with a substantial portfolio — which is a different situation, and one where the simple fix is to charge the applicable federal rate. Where that rate comes from.
The conditions that switch it off
- The aggregate ceiling. The cap stops applying on any day the total outstanding between the two people exceeds $100,000.
- Tax avoidance. “Subparagraph (A) shall not apply to any loan the interest arrangements of which have as 1 of their principal purposes the avoidance of any Federal tax.”
Both thresholds are tested on the AGGREGATE outstanding balance between the same two people, and tested DAILY – the statute says ‘any day on which the aggregate outstanding amount of loans between such individuals’ exceeds the figure.
Lending in the other direction
Do not confuse this with the $10,000 rule
They are different provisions doing different jobs. The $10,000 rule is a genuine de minimis exclusion — below it, section 7872 simply does not apply, unless the money went into income-producing assets. The $100,000 rule is a ceiling on a cap. Being under $10,000 is simpler; being under $100,000 is conditional. Both, in order.
General information drawn from IRS, Medicare, HUD and state statute and regulation, not legal, tax or financial advice. Continuing-care law is state law and differs materially between states; every figure here is year-labelled and every source named. Powers of attorney, guardianship and trusts are governed by STATE law and differ change, and interest rates published by the IRS change every month – never rely on a rate quoted on any page, including this one. We are not a law firm or a tax adviser, and this is not legal or tax advice.