Are Personal Loans Taxable?

Generally, personal loans are not considered taxable income because they are borrowed funds that must be repaid. The IRS doesn't tax borrowed money as earnings, so if you get a personal loan and pay it back over time you won't be required to pay taxes on it or report the loan on your tax return.

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When Could a Personal Loan Be Taxable?

If part of your loan debt is forgiven, such as with a student loan, the forgiven portion may be considered taxable. You would need to report the canceled debt on your tax return for the year in which it was canceled. If a lender cancels any of your loan debt, you may receive a 1099-C form, which applies to canceled debt of $600 or more.

There could be tax implications if a friend or family member loans you money without charging interest or if the interest amount is considered below market rate. There's an exception for gift loans of $10,000 or less, so this would only apply to larger loans.

Is Interest on a Personal Loan Tax Deductible?

Interest on a personal loan is generally not tax-deductible when you are using that loan for personal use.

Exceptions include:

• Business expenses: If you use the loan for business expenses, such as if you're a self-employed individual and weren't able to qualify for a business loan, the interest may be tax-deductible.

• Taxable investments: If you borrow money specifically to invest, it likely qualifies for deduction.

What If You Receive a 1099-C Form?

If you receive a 1099-C form, it means a lender canceled $600 or more of the debt from your outstanding loan, and the canceled amount may be treated as taxable income. This means you need to report this amount on your tax return unless you qualify for a special exclusion, such as insolvency.

How To Avoid Tax Surprises with Personal Loans

No one wants a surprise tax burden, and you can minimize the chances of that happening by keeping thorough records of your personal loan, including the initial agreement and terms as well as your history of payment. Always ask for written agreements, even if you get a loan from a friend or family member rather than going through a traditional lender.

If any debt from your loan is settled, ask the lender if you can receive a 1099-C form to assist with reporting the settled debt on your tax return.

If you're unsure whether your personal loan qualifies for deductions or how to handle loan forgiveness on your tax return, speak with a tax advisor to get personalized advice.

Personal Loans vs. Other Types of Loans and Taxes

Here's how personal loans compare to other types of loans when it comes to their taxability and eligibility for deductions.

The Bottom Line

In most cases, you don't need to worry about taxes on a personal loan. The few exceptions to keep in mind include if part of your loan is canceled, if you used a personal loan for business or if your loan is from a private party rather than a traditional lender.

In any case, your best bet is to keep good records and consult a tax professional for advice.

FAQs

Do I need to report a personal loan on my taxes?

No, you don't need to report a personal loan on your taxes unless part of the loan debt is canceled or forgiven.

Is loan forgiveness always taxable?

Loan forgiveness is usually taxable. Exceptions include certain types of student loan forgiveness and debt discharged through bankruptcy or insolvency.

Can I write off personal loan interest if I used it to pay off credit cards?

No, you can't write off personal loan interest in this situation because the IRS considers it personal interest that doesn't qualify for a deduction.

What happens if I don’t repay a personal loan from a friend or family member?

Not only can failing to repay a loan from a family member or friend damage your relationship, but it could also result in legal action if they decide to take legal action to recover the money owed to them.

Sources:

• IRS. "Topic no. 431, Canceled debt – Is it taxable or not?"

• IRS. "Topic no. 456, Student loan interest deduction."

• IRS. "About Form 1099-C, Cancellation of Debt."

• Cornell Law. "26 U.S. Code § 7872 - Treatment of loans with below-market interest rates."

• IRS. "Business Expenses."

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