Personal Loans and Taxes: Essential Things You Must Know

Personal loans and taxes are both essential responsibilities that can affect the state of their finances. In particular, personal loans are an opportunity to gain the funds you need for necessary or emergency expenses.

However, are personal loans tax deductible? Continue reading to find out.

Generally, Are Personal Loans Tax Deductible?

Personal loans are not typically tax-deductible. The IRS does allow for some tax deductions related to the interest payments on personal loans. But, these tax deductions are usually limited to interest on home equity loans and college loans.

The interest payments on personal loans are typically not tax-deductible. However, there are some exceptions to this rule.

What Types of Loans Can Be Deducted from Your Annual Taxes?

As mentioned previously, a few types of loans can be deducted from your taxes. The majority of these are loans necessary to handle expenses related to the home and education. The following are all deductible:

• Refinancing of loans for your home or your education
• Refinancing with a lower rate
• Refinancing with a lower balance
• Consolidating loans with higher interest rates into a new loan with a lower rate

The interest on these loans is typically deductible. This includes:

• Home equity loans for the following reasons:
  • Purchase of a home
  • Home Improvement
  • Renovation of property or facilities of a qualified business
• Student loans for the following reasons:
  • To attend an eligible educational institution
  • For tuition, books, supplies, and equipment required as a condition of enrollment or attendance as a student
  • To pay a qualified student loan interest For expenses related to a work-study program

Are There Exceptions to the Rule?

There are a few exceptions to the above deductions.

1. Personal Loans for Financing Business Expenses

A personal loan for business can not be deducted from your taxes. This is because it is a financial transaction between two companies. This makes it a non-deductible expense.

2. Personal Loans to Buy a Vehicle

Any personal loan related to purchasing a new or used car, motorcycle, boat, or other vehicle is not deductible. It is partially because they are not considered necessary expenses by the IRS.

However, if the vehicle is used for business purposes and is purchased or financed with a loan, it is possible to deduct the interest paid on that loan.

3. Personal Loans to Invest in a Partnership, LLC, or S Corporation

Loans to invest in a partnership, LLC, or S corporation are not tax-deductible. This is because the income made from these investments is considered passive income.

Final Thoughts

Personal loans can be an essential source of financing for many people. They are not typically completely tax-deductible. However, there are a few instances where the interest paid on these loans can be deducted from your taxes.

Contact Magnolia Finance Company today if you’re thinking of taking out emergency loans but have questions or concerns. Magnolia Finance Company offers personal loans in Huntsville, AL, to help people pay for their expenses or work on rebuilding their credit. Call us at 256-533-2099 to discuss your options.