Personal loans are not generally considered taxable income. However, there are exceptions to this rule and it’s best to consult with a tax advisor if you have any questions or concerns about your personal loan.
If a loan is forgiven, it becomes classified as a Cancellation of Debt (COD) and may be considered taxable income.
What are Personal Loans?
Loans are generally funded by banks, employers, or even peer-to-peer (P2P) lending networks that allow the borrower to use the funds as needed.
Most personal loans are unsecured, meaning they don’t generally require collateral, as opposed to mortgage or car loans, where defaulting on your payment can result in the bank repossessing your house or vehicle.
Since no collateral is required, these loans are riskier to lenders and may result in higher interest rates to ensure they receive repayment.
As with any loan you take out, contact your potential lender to learn more about interest rates, term lengths, and repayment options. It may also help you do some research to determine the best loan lender for your situation.
Cancellation of Debt (COD)
If you find yourself in a situation where your personal loan is canceled or forgiven, it may be considered taxable income by the IRS. If a personal loan is canceled or forgiven, the financial institution is required to send the borrower a 1099-C form if the canceled debt is more than $600 and is considered taxable. However, your personal situation is taken into consideration which is why it’s best to work with a professional if you’re unsure.
However, debt cancelation may come with many stipulations and exceptions. According to IRS.gov, here are some situations in which your debt might have exceptions:
- Debts canceled as gifts or inheritance
- Qualified student loans
- Educational loans or relief programs that provide health services
- If the debt would be deductible if a taxpayer-paid it
- Purchase price reduction on property provided by a seller
- Payments to mortgages that reduce principal balances as outlined in the Home Affordable Modification Program
- Student loan amounts discharged due to student death or disability
- Title 11 bankruptcy case
- Canceled debt to the extent insolvent
- Qualified farm indebtedness
- Qualified real property business indebtedness
- Qualified principal residence indebtedness
Like with any major financial situation, check with an advisor to determine your loan status and whether it qualifies as income.
If the loan is canceled or forgiven, you may be required to file with the IRS as a Cancellation of Debt (COD) recording unless it is excluded for one of the reasons mentioned above. Please work with a tax advisor to determine the status of your cancellation and how it affects your taxes.