A high-income individual lends $300,000 to their spouse at the prescribed interest rate to invest in a portfolio expected to generate $18,000 in interest income annually. The prescribed rate is 3%. Which of the following is true regarding the tax treatment of this arrangement under current attribution rules?

Question: A high-income individual lends $300,000 to their spouse at the prescribed interest rate to invest in a portfolio expected to generate $18,000 in interest income annually. The prescribed rate is 3%. Which of the following is true regarding the tax treatment of this arrangement under current attribution rules?

Answer options: ✅ The lending spouse must report $9,000 of interest income.

• The borrowing spouse must report all $18,000 of investment income.
• The borrowing spouse must report $9,000 of investment income, net of the interest paid.
• No income is attributed back to the lending spouse if the interest is paid annually by December 30.

Correct answer: The lending spouse must report $9,000 of interest income.

Explanation: Under the spousal loan attribution rules, the prescribed interest must be paid annually by December 30th. If so, only the prescribed interest amount is attributed to the lending spouse who then reports it as income; the remaining investment income is taxed in the hands of the borrowing spouse. Here, the lending spouse reports $300,000 * 3% = $9,000.