REG 3 - Related Party Transactions

Question 1

Explain below-market loans and imputed interest? How is foregone interest treated. What are the two exceptions for interest of loans given less than $100,000?

Answer 1

Individuals who make a below-market loan GENERALLY must report any foregone interest as interest income.

Exceptions:

1) Foregone interest for lender and borrower is limited to the amount of the borrower’s investment income for loans given less than $100,000.

E.g. Grandpa (lender) gives grandson (borrower) $100,000. The deduction of interest is limited to the amount of investment income (like itemized deductions).

2) If the borrower’s investment income is $1,000 or less, then foregone interest is $0.

E.g. If grandson has $1,000 investment income, the foregone interest is $0.