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I am planning to lend a personal loan, to be documented with a promissory note. I was wondering if there should be any concern that the repayment of principal would appear to be taxable income when I get it back? Likewise would it appear to be taxable income for the recipient?

Is there anything specific that must be done by either the lender or the recipient in the tax year when the loan is made, for the IRS?

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    Principal is not income, interest is.
    – littleadv
    Feb 1 at 2:04

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As @littleadv said in the comments, interest is income. If you lend Fred $20 for lunch and he just pays you back, that isn't income for either of you. If you charge him an extra $1 for the loan, that $1 is income for you.

Though realistically nobody bothers tracking amounts that small; they sweep it under the *gifts" carpet.

For larger amounts, it may be worth doing a formal loan contract. I've lent a friend a large enough chunk of change that we made it a genuine mortgage on his house... not so much because I need the security as because we wanted to have it on record that this wasn't a gift. That did cost us some lawyer time, though it's a pretty boilerplate transaction. Offsetting that cost is the fact that he can now point to that as evidence and claim the interest expense in his taxes, if he wants to do so. Note that, at least in the US, there is a mandatory minimum interest rate (about 0.3% for us) below which it won't be considered a legitimate mortgage; I'm not sure whether that's true for other loans.

For other fun games you can play with this, websearch "in-family mortgage"; wealthy families have been known to use this as a way to dodge gift taxes in large transfers.

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  • Thanks. If the amount is below the cap but a good chunk of it, does it have to be indicated somewhere in a 1040xxxx form, for either party?
    – Pete W
    Feb 1 at 14:04

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