Are Personal Loans Tax Deductible?

A man and his accountant reviewing taxes to see which of his personal loans are tax deductible.

Personal loans are among the most common financing that people rely on for their borrowing needs. They’re relatively easy to obtain, and there are usually few or no restrictions on what you can use them for.

If you’re considering a personal loan, you wonder whether the interest is tax deductible. The following overview can be helpful in understanding how the IRS treats these loans.

It’s important to keep in mind that IRS regulations change every year. Something that is tax deductible one year may not be the next. Because of this, you should consult with a tax professional before taking any tax deductions. 

Can You Deduct a Personal Loan on Your Taxes?

Generally speaking, the interest on personal loans is not tax deductible. That’s because these loans can be used for many different purposes that the IRS does not deem worthy of tax deduction. 

A personal loan can be used for a vacation, for example, or to pay for a family reunion. These are not activities that have special tax statuses.

There are three different things that a personal loan can be used for, however, that may qualify for a tax deduction. These include certain business expenses, qualified higher education expenses, and taxable investments.

Certain Business Expenses

Interest on a personal loan may be tax deductible if it is used for certain business expenses. You may be able to deduct the interest from a personal loan, for example, if it is used to purchase office equipment, manufacturing machinery, or inventory.

To deduct the interest from a personal loan used for business expenses on your taxes, you must itemize the percent of the items purchased that are used for business. For example, if you purchase a new computer for your business but you use it 30% of the time for personal use, you would only be able to deduct 70% of the interest on your taxes.

Qualified Higher Education Expenses

Interest from a personal loan can be deducted if it’s used for qualified education expenses. It can also be deducted if it’s used to refinance an existing student loan. Expenses that may qualify for an interest deduction include tuition, books, and certain education fees.

To qualify for this deduction, you must be pursuing a degree, certificate, or credential on at least a half-time basis. It also can’t be deducted if you are claimed as a dependent on someone else’s tax return or if you are filing as “married filing separately.”

Taxable Investments

Finally, you may be able to deduct the interest on a personal loan if it’s used to purchase certain taxable investments. Qualifying investments may include mutual funds, stocks, and some bonds.

Types of Loans With Tax Deductible Interest

Although the interest from most personal loans is not tax-deductible, the interest from several other loan types may be tax deductible as long as certain criteria are met. Depending on your needs, one of the following loans may be a better option than a personal loan. 

Because each of these loans was designed for specific purposes, they may have certain benefits that personal loans don’t have.

With a student loan, for example, you don’t have to start repaying the money you borrowed until six months after you graduate. This grace period gives you time to find work and start earning money.

Student Loans

The federal government wants to encourage people to earn college degrees. One way they do this is to allow people to deduct up to $2,500 in interest each year from their student loans. The student loan must be used to pay for certain educational expenses to qualify. Examples include tuition, books, and fees.

Not all expenses incurred at a college or university are eligible for a tax deduction. Expenses that do not qualify include:

  • Insurance
  • Room and board
  • Transportation
  • Medical expenses

Certain Home Equity Loans

Many homeowners borrow against the equity in their homes to get a low-interest rate on home remodeling projects and other things. Home equity lines of credit (HELOCs) are another type of loan that uses the equity in your home as collateral.

After the passage of the Tax Cuts and Jobs Act (TCJA) of 2017, the interest on home equity loans and HELOCs is tax deductible up to a certain amount if it’s used to build a home or perform substantial renovations. Minor cosmetic upgrades to a home do not qualify.

Mortgages

Similar to home equity loans, mortgage interest is also tax deductible up to a certain amount if it is used to buy, build, or perform substantial renovations to a home. To qualify for the interest deduction, you must itemize your deductions.

Business Loans

Many businesses use loans to either start or expand their operations. The interest on business loans is tax deductible as long as it’s used for business purposes. The person who takes out the loan must be legally liable for the debt to qualify for the tax deduction.

Investment Loans

If you borrow money for certain investments, the interest is tax-deductible. A margin loan for the purchase of company stock could be eligible. A margin loan is a type of short-term loan where a brokerage firm lends you money for an investment.

Personal Loans With Atlantic Financial Federal Credit Union

If you’re thinking about applying for a personal loan to purchase a big ticket item, consolidate debt, pay for an event, or something else, Atlantic Financial Federal Credit Union offers a personal loan with a competitive interest rate.

There’s no application fee to apply, and flexible terms of up to 60 months are available. Collateral is also not required. This makes it a hassle-free way of getting the money you need.

Click on the following link to learn more about our personal loans. You can also use our online loan calculator to estimate your monthly payments.

See Our Personal Loan Options & Benefits