The concept of "deemed interest" - does it exist in the U.S.A?

[Roy N.]

Good morning BP!

I was over in the blogs this morning reading Brandon Turner's latest essay, "The Definitive Guide to Using Seller Financing to Buy Real Estate" and, in the comments following the article there are two references to seller carried notes at 0% interest - one including an inflated sale price as an offset for no interest.

These references started me wondering and I have a few questions:

1) Does the IRS wield the concept of "deemed interest"? Here on the north side of the 49th, creating a note (taking a mortgage) at 0% interest would most probably initiate sirens and red flashing lights at taxman central, who, in-turn, might very well deem the lender to have written the note at the prevailing bank rate and tax her/him accordingly.

2) If zero interest notes/mortgages are legal in the U.S.A, are there any special considerations in structuring one to keep it legal?

I expect @Bill Gulley or @Dion DePaoli or @Jeff S could quickly and succinctly {maybe not Bill} clarify my confusion.

[@Joshua Dorkin ... I'm back to the @mention only working for your name]