Question

Unsecured loan to family

Forum|Forum|1 year ago
January 21, 2025
2 replies
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I made an unsecured loan to a family member.

1) What document do I need to provide to the family member in order for them to be able to deduct the interest they paid?

2) What document do I need to file in order to declare the interest that I received?

Not A Product Question

M

Mike9241

There should be a formal (written) document. It should include the loan amount, interest rate, repayment schedule (could be on demand), and any penalties for missed payments. Having a formal agreement would demonstrate to the IRS that this is a legitimate loan and not a gift.

as for tax forms to be issued for the interest paid /received - none.

DaveF1006

It depends on the character and nature of the loan. If this was a personal unsecured loan, no interest paid is deductible. You may not deduct interest expenses from an unsecured personal loan unless the loan is for business expenses, qualified education expenses, or eligible taxable investments.

If the loan was given for any of these other than personal, there should be a written document as Mike9241 mentions listing the contingencies mentioned in his post. This way, if your family member is audited for claiming loan interest, he/she has proof that the loan is for something other than a personal loan.

@bk68

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J

jreed3728

One more thing to know. In order to qualify as a loan, you must charge a minimal interest rate. You can find these at https://www.irs.gov/applicable-federal-rates. If you don't charge at least that rate, the IRS would consider it as a gift. Also, with the written contract, you have options in case the borrower does not repay the loan. The IRS will allow you to deduct the unpaid amount as a bad debt.