laine loaned her brother, Mike, $175,000 to purchase a new home. Elaine does not

Question

laine loaned her brother, Mike, $175,000 to purchase a new home. Elaine does not charge Mike any interest on the loan. What are the tax consequences to Elaine and Mike?

A. Mike can deduct the interest that he is deemed to have paid Elaine.
B. If Mike has no net investment income, Elaine does not have to treat the forgone interest as a gift.
C. Elaine only has to impute interest on $75,000 of the loan to Mike.
D.  Elaine is treated as having made a gift of the forgone interest on the $175,000 loan to Mike.

Explanation / Answer

Ans. D

Because the loan amount is less than $250,000 Elaine will not be required to report that interest as income and is treated as gift equal to the amount of forgone interest only.

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