Question: ( 5 ) Lily received a $ 1 5 0 , 0 0 0 inheritance. With the proceeds, Lily purchased rental properties and bonds. Lily

(5)

Lily received a $

150, 000

inheritance. With the proceeds, Lily purchased rental properties and bonds. Lily currently has $

150, 000

in personal liabilities. What tax effect could Lily have realized if the inheritance had been used to pay off the liabilities, and the investments were then purchased using a bank loan?

The inheritance income would be taxed.

There would be no tax effect.

Lily could deduct the interest payments on the loan used to purchase the investments against the property income.

Lily would be taxed on the interest payments on the loan used to purchase the investments.

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