On January 1, Donald loaned his daughter, Ivanka, $90,000 to purchase a new pers
ID: 2522165 • Letter: O
Question
On January 1, Donald loaned his daughter, Ivanka, $90,000 to purchase a new personal residence. There were no other loans outstanding between Donald and Ivanka. Ivanka’s only income was $30,000 salary and $4,000 interest income. Donald had investment income of $200,000. Donald did not charge Ivanka interest. The relevant federal rate was 9%.
For the current year: Ivanka must recognize $8,100 (0.09 x $90,000) imputed interest income on the loan.
Donald must recognize imputed interest income of $4,000.
Donald must recognize imputed interest income of $8,100.
Ivanka is allowed a deduction for imputed interest of $8,100.
Explanation / Answer
Imputed interest comes into play when someone makes a "below-market" loan. That's a loan with an interest rate below a certain minimum level set by the government, known as the Applicable Federal Rate, or AFR.
In given question, imputed interest is $8,100. Hence it will be added in Donald computation and allowed as deduction in Ivanka computation.
Hence Taxable income of Ivanka = 30000 + 4000 -8100 = $25,900
Taxable Income for Donald = 200,000 + 8,100 = $ 208,100