The below-market loan to a relative was considered both a gift andinterest incom

Question

The below-market loan to a relative was considered both a gift andinterest income to the lender for the following reason:

1—That portion of the interest that is below the rate theFederal government pays is considered a gift, since the borrowerdoes not have to pay as much interest as he or she would have tounder an ordinary loan. This is in effect the same as if theborrower paid the government rate of interest to the lender butreceived a gift for the interest amount below the governmentrate.
2- The lender is deemed to receive interest income since he/she isreceiving back more monies than what was actually given.
The below-market loan to a relative was considered both a gift andinterest income to the lender for the following reason:

1—That portion of the interest that is below the rate theFederal government pays is considered a gift, since the borrowerdoes not have to pay as much interest as he or she would have tounder an ordinary loan. This is in effect the same as if theborrower paid the government rate of interest to the lender butreceived a gift for the interest amount below the governmentrate.
2- The lender is deemed to receive interest income since he/she isreceiving back more monies than what was actually given.

Explanation / Answer

I would say it would have to be choice 2. Becuase the lender recieves income from the gift, the lender must pay the taxes on the interest. Please note that I have not taken a course in this area, but am currently using this type of loan. I asked the lender and that was how he put it "in a nutshell."

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.