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Loan was set up with one annual payment of principal and interest (based on Fed tax tables)until the loan is paid off. Was not necessarily looking at back end interest deductions. Rather if the gift of $10,000 is applied to the principal, can the interest that is owed for the same year be rolled into the loan balance and paid off in the future through additional $10,000 gifts?

If so, would the lender have to report the interest income and/or would the borrower have an investment interest deduction in the current year?

Correct, correct, and to the extent the borrower has investment income.
Assuming the loan was used for investment purposes.
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