Elaine 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?

Question

Quizplus · Accepted Answer

By not charging interest on the loan, Elaine is essentially gifting Mike the interest he would have otherwise had to pay on the loan. The forgone interest is considered a gift, and therefore subject to gift tax rules. Elaine will need to file a gift tax return if the forgone interest exceeds the annual exclusion amount. Mike cannot deduct the interest he is deemed to have paid Elaine because the loan does not meet the requirements for deductible home mortgage interest.

Elaine Loaned Her Brother, Mike, $175,000 to Purchase a New