Are personal loans taxable and considered income?
Learn about the circumstances under which you must report your loan’s unpaid balance to the IRS
A personal loan is useful for many expenses, such as debt consolidation, medical expenses and home renovations. Since you get a lump sum of cash from your lender, it might seem like you have to report this money as income to the IRS, but that’s only the case sometimes.
Here’s what you need to know about when you must report your personal loan as taxable income and when you can write off loan interest in your favor.
Key insights
- You don’t need to report personal loans as income unless they’re forgiven.
- You can write off certain personal loan interest.
- Lenders will send out a 1099-C form for canceled debt.
What is a personal loan?
A personal loan is a type of unsecured loan you can use for a variety of purposes, from consolidating debt to financing a large purchase. The rate on a personal loan is usually fixed, meaning it won't change over the life of the loan, and you repay a personal loan in fixed monthly payments over a set period (typically two to five years).
What is taxable income?
Consumer finance expert Loretta Kilday, who works at DebtConsolidationCare, which provides free debt advice to consumers, defines taxable income as “any salaries, wages, freelancing income, tips and bonuses that a person earns over a year. …. The IRS defines income as any money you make, whether from a job or investments.”
Income can also be from not-so-obvious sources, such as the following:
- Free products received in exchange for reviews/promotion
- Prize winnings
- Interest earned on investments
- Capital gains from the sale of a home or asset
- Rental income
Is a personal loan considered income?
A personal loan isn’t gifted to you as free money. It also isn’t money you earn. Instead, the funds are part of a binding agreement between you and a lender in exchange for repayment plus interest.
As a result, you don’t have to report a personal loan on your taxes. However, if your lender ever cancels a portion or all of your loan, that will likely be considered income.
What is cancellation of debt income?
Debt can be canceled partially or completely through negotiations with the lender. While borrowers can do these debt negotiations themselves, many use a debt relief company or lawyer to negotiate on their behalf.
“The lender will issue a COD [cancellation of debt] and send you a 1099-C form if they decide to forgive your debt,” said Kilday, from DebtCC. “When you file your taxes with the IRS, you must include this form with your tax return to record the canceled amount.”
When a lender cancels or forgives all or part of your debt, the IRS considers that amount income.
It’s important to note that not all canceled debts are considered taxable income by the IRS. Some types of loan forgiveness programs may come with exceptions. If your debt is canceled as a gift or inheritance, or qualifies for farm indebtedness, you will not have to report the cancellation as income.
Debt canceled through bankruptcy does not have to be reported to the IRS.
Can I deduct the interest from my personal loan?
You may be able to deduct the interest from a personal loan on your taxes, depending on how you use the loan.
If you’re using the loan for certain business or investment purposes, such as purchasing equipment or investing in stocks, you can generally deduct the interest payments. However, if you took out the loan for personal reasons, such as for a car purchase or vacation, you cannot deduct the interest payments.
Some unique situations may allow for special deductions for personal loans. For example, if you're using a personal loan to fund an educational program — either undergraduate or graduate — at an eligible institution, then the interest payments you made during the year can be deducted from your taxes, up to certain limitations set by the IRS.
To determine your eligibility to deduct interest from a personal loan, speak with a qualified tax professional and provide them with all relevant information about your loan terms and details. They’ll be able to advise you on whether or not your specific situation allows for this tax deduction.
FAQ
Will a personal loan affect my taxes?
A personal loan only affects your taxes if you have canceled debt or you qualify to write off the interest on the loan. For most personal loans used for personal uses — such as debt consolidation, home remodeling or traveling — you do not include them on your tax forms.
Are personal loans for home improvements tax deductible?
For a home improvement loan to be considered tax deductible, you must have taken it out through your home, such as through a home equity loan or home equity line of credit (HELOC).
However, the IRS has limited deductions on interest incurred before 2018 and after 2025. This means that if you take out a home equity loan or HELOC for home improvements, you won’t be able to write off the interest until 2025.
Is repaying a personal loan considered income?
It is not considered income. You borrowed money and repaid it with interest, so you didn’t earn any income from the loan.
Bottom line
A personal loan is a form of debt, like a credit card balance or a mortgage. You must repay the money you borrowed with interest, and you don’t have to report the loan as income to the IRS. The only time you are taxed on the money you borrowed is if the lender forgives part or all of the loan.
Article sources
- IRS, " Topic No. 456 Student Loan Interest Deduction ." Accessed Jan. 7, 2023.
- IRS, “ Topic No. 505 Interest Expense .” Accessed Jan. 7, 2023.
- IRS, “ Topic No. 431 Canceled Debt – Is It Taxable or Not? ” Accessed Jan. 7, 2023.
- IRS, “ Is interest on a home equity line of credit deductible as a second mortgage? ” Accessed Jan. 7, 2023.
