Personal Loan Interest Deductible?

[footsox]

I think in most circumstances, personal loan interest is not deductible. However, If we used it to buy a house, does that change anything? I have over $10,000 in interest we paid on a personal loan in 2024, and we used the funds to buy a house (for our personal residence). Thanks for all your help.

[GWPotter]

Guess on my part -

Have the person(s) who loaned you the money create a 1098 form. Google has links to get IRS forms.

[footsox]

Hi GWPotter, The entity that gave me the personal loan is a bank. I don’t think I received a 1098 form.

[GWPotter]

Google seemed to be saying mortgage interest is a 1098 item. ie you need to report it that way, so perhaps the easiest way is ask the bank.

[aj485]

@footsox

However, If we used it to buy a house, does that change anything?

No.

@footsox

I have over $10,000 in interest we paid on a personal loan in 2024, and we used the funds to buy a house (for our personal residence).

The only mortgage interest that you can deduct on a personal residence is interest on a loan that’s secured by the home as collateral. Since this is a personal loan that’s not secured by the house, it’s not deductible as mortgage interest.

AJ

[aj485]

@GWPotter

Google seemed to be saying mortgage interest is a 1098 item.

Mortgage interest is usually reported on a 1098. But it doesn’t have to be. When private sellers are carrying a mortgage, they generally only have to provide a statement of the interest paid, not a 1098. And if your personal residence or 2nd home is an RV, that interest won’t be reported on a 1098, but it’s still deductible, as long as the loan is secured by the RV.

I will also point out that just because mortgage interest is reported on a 1098 doesn’t mean it’s all deductible. For instance, if you did a cash out refi and spent the cash you got on a new car, the interest on the cash that you took out is not deductible, because you did not spend it on the house. Plus, if you have mortgages of more than $750k, some of the interest is likely not deductible because you exceeded the mortgage limitation on the mortgage debt that is allowable for deductibility. IRS Pub 936 has lots of details on the home mortgage interest deduction 2024 Publication 936

AJ

[aj485]

I also just found the thread where you were asking about this scenario last year when considering what type of loan to get Is 1 point “normal”? - Personal Finances / Buying or Selling a Home - Motley Fool Community

It was pointed out several times that only interest on a loan secured by the house would be deductible:

@aj485

I will also point out that if the asset loan from eTrade is not secured by the property, that interest will not be deductible as home mortgage interest. A $592.6k interest only loan at 5.69% will generate $33.7k in interest a year, which by itself, even without accounting for up to $10k in SALT deductions, medical deductions, charitable contributions, or any other itemized deductions, exceeds the standard deduction even for a MFJ couple who are both over 65.

and

@aj485

They will need to do their analysis. They just need to be aware that if they use the eTrade loan, they likely won’t ever be able to deduct any interest, even if they refinance into a mortgage, while if they take a purchase mortgage, the interest will be deductible.

AJ