Lily Chen received a $150,000 inheritance in 2021. 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.

Multiple Choice

• Lily could deduct the interest payments on the loan used to purchase the investments.

• The property income would be taxed as regular income.

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

• There would be no tax effect.