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

When someone loans money to another person and does not charge any interest or charges interest at a rate lower than the applicable federal rate (AFR), the IRS may consider it a gift of the forgone interest. In this case, Elaine is giving up the opportunity to earn interest on the $175,000 loan to Mike, so she is treated as having made a gift of the forgone interest amount to Mike. This gift may be subject to gift tax regulations if it exceeds the annual gift tax exclusion amount ($15,000 per person in 2020).

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