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Unless and until the donor recognizes taxable income of the interest charged in the example, the donor has no tax basis, therefore the recipient has no tax basis either. The gift tax basis rules cover this concept.

In my first response, I stipulated that the donor would have to recognize the interest income. But leaving that aside, I am interested in your concept of 'basis' in a forgiveness of interest situation. I don't see it as property, I find no mention in the 'gift tax rules' about the concept. Can you be more specific?

And finally, why should you have a different result if the donor gifts tax which is used to pay back the interest rather than forgive the interest.


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