Finance
A Minnesota seller provides seller financing at an interest rate below the applicable federal rate (AFR). What tax consequence may occur?
AThe seller must pay capital gains tax immediately
BThe IRS may impute a higher interest rate, creating phantom income✓ Correct
CThe buyer cannot deduct mortgage interest
DThe transaction is automatically void
Explanation
When seller financing is offered at below-market rates, the IRS imputed interest rules may apply, treating a portion of the principal payments as interest income to the seller. This creates taxable income even if not received as cash. Minnesota sellers providing financing should consult tax advisors to understand these implications.
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