Are interests on personal loans deductible (against income tax) if it is used for investment purposes?
Tuesday, July 21st, 2009 at
10:27 pm
Mike C asked:
Say I borrow money from my brother at a reasonable market rate (so that the IRS will not call it a “gift” (say I borrow at 5% or 6%)) to invest in stocks, bonds, or real estate, would that interest I pay to my brother be tax deductible? Assume that I will draft up an official loan agreement defining interest, term, etc. Also, assume that I deposit the entire amount I borrow from my brother directly into an account completely separate from my current accounts (say I open up a new bank or brokerage account) so all cash flow could be traced.
Say I borrow money from my brother at a reasonable market rate (so that the IRS will not call it a “gift” (say I borrow at 5% or 6%)) to invest in stocks, bonds, or real estate, would that interest I pay to my brother be tax deductible? Assume that I will draft up an official loan agreement defining interest, term, etc. Also, assume that I deposit the entire amount I borrow from my brother directly into an account completely separate from my current accounts (say I open up a new bank or brokerage account) so all cash flow could be traced.
Tagged with: Cash Flow • Personal Loans • Real Estate
Filed under: Investing
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Interest on personal loans is not deductible. You could not deduct the interest paid to your brother on money you borrowed for personal investments any more than you could deduct the interest paid to a credit card company if you obtained the money by a cash advance.
If your brother can produce a 1098 form at the end of the year for you for tax purposes and then validate it with his ID number that loaning institutions have to provide the IRS to verify that the loan is a qualified tax exemption loan, like a home loan or an educational loan, then sure. you could try that. Of course if you can’t produce all that documentation then the odds are you will be getting a letter from the IRS asking you to come on down and bring all of your tax papers with you, for your happy go lucky audit that you just bought yourself.
Brian G is wrong (and right…he’s right that you cannot deduct typical personal loan interest however…). Since you are using the borrowed funds for investment purposes, you CAN deduct the interest against your tax. However, you cannot deduct interest if you use the funds to purchase non-taxable securities (such as tax-exempt municipal bonds). IRS has strict guideline regarding debt and the purchase of tax-exempt investments.