CPA · Question 02 · Area I: Individual Compliance and Planning
A taxpayer provides an interest-free loan of $200,000 to their adult child on January 1, Year 1, to purchase a primary residence. The loan is payable on demand. The applicable federal rate (AFR) for Year 1 is 4%. The child has net investment income of $800 for Year 1. Assuming the gift tax annual exclusion is $18,000, what are the income tax implications for the lender (parent) regarding imputed interest?
Answer options:
The lender must recognize $8,000 of interest income.
The lender recognizes $0 interest income because the loan is under $100,000.
The lender recognizes $8,000 of interest income.
The lender recognizes $800 of interest income.
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