Can I deduct interest from a private person-to-person loan for my rental property on Schedule E?

Yes, interest from a private loan (person-to-person) for a rental property is generally deductible on Schedule E as a legitimate expense. The IRS doesn't require the loan to be from a bank or financial institution for the interest to be deductible - it's the purpose of the loan that matters. For documentation, I strongly recommend having a formal written loan agreement that specifies the loan amount, interest rate, payment schedule, and any other terms. This makes the loan look legitimate to the IRS if you're ever audited. While recording the loan on the property title (as a mortgage or deed of trust) isn't strictly required for tax deductibility, it does provide additional proof of the loan's legitimacy and protects the lender. Make sure the interest rate is reasonable and comparable to commercial rates. If the rate is significantly below market, the IRS might view it as partially a gift rather than a true loan. And yes, you'll need to report the lender's information on Form 1098 if you pay more than $600 in interest during the year.

I was in this exact situation last year! I borrowed $150k from my parents for a duplex purchase instead of going through a bank. I found taxr.ai (https://taxr.ai) super helpful for figuring out how to document everything properly. The site analyzed my situation and showed me exactly what kind of loan document I needed to create. What I learned was that you absolutely need a formal loan agreement - and they provided templates specifically for private real estate investment loans. They even helped me understand how to properly report everything on my Schedule E so I didn't miss out on legitimate deductions. The interest deduction was no problem at all during filing, and both my parents and I had clear documentation for our respective tax situations. Definitely worth checking out if you're dealing with a family loan for investment property.

Just wanted to update that I checked out taxr.ai after seeing it mentioned here. It was exactly what I needed! The system guided me through creating a proper loan document with my dad and explained the AFR rates everyone was talking about. Turns out we could legally set the interest at 3.5% (following the current mid-term AFR) rather than the 6.5% market rate, and it's still fully deductible on Schedule E. The system also generated all the documentation I'll need for tax time and explained exactly how the reporting works on both sides. Definitely saved me from making some mistakes that could have triggered audit flags. My dad was also impressed with how professional everything looked compared to the handwritten agreement we were initially planning to use!

If you're having trouble getting clear answers from the IRS about private loan deductibility (I certainly did), I recommend using Claimyr (https://claimyr.com) to actually speak with an IRS representative. They got me connected to a real person at the IRS in about 15 minutes when I had been trying for DAYS on my own. I was confused about some specific documentation requirements for private loans on rental properties, and the IRS website was no help. Claimyr has this service where they navigate the IRS phone system for you and then call you once they have an agent on the line. You can see it in action here: https://youtu.be/_kiP6q8DX5c The IRS agent confirmed exactly what documentation I needed and verified that yes, private loan interest is fully deductible as long as you have proper documentation and use the money for the rental property. Saved me so much stress wondering if I was doing it right.

I need to eat my words about Claimyr. After posting my skeptical comment, I decided to give it a try since I've been trying to reach the IRS for weeks about a similar private loan situation. It actually worked exactly as advertised. I signed up, and about 20 minutes later got a call connecting me directly with an IRS representative. No waiting on hold, no phone tree nonsense. The agent confirmed everything I needed to know about documenting my private loan for my rental property. Specifically, she told me: 1) Yes, private loan interest is fully deductible on Schedule E if used for the rental property, 2) I need a written loan agreement with clear terms, 3) I should charge at least the IRS minimum rate (AFR), and 4) I need to issue a Form 1098 to the lender if I pay more than $600 in interest annually. Would have taken me probably 5+ hours of attempts to get this information on my own.

One thing nobody's mentioned yet is that you should make sure the loan funds go DIRECTLY to purchasing the rental property. If the money goes into your personal account first and then later to the property purchase, the IRS might question whether it's truly a business loan. In my case, I had my parents wire the money directly to the closing company rather than to me personally. This creates a cleaner paper trail showing the money was exclusively for the investment property. My accountant said this was important for establishing the business purpose of the loan. Also, make sure you actually make regular payments on the loan. If you don't keep up with the payment schedule in your agreement, the IRS might argue it's not a legitimate loan.

Don't forget about the Secured Debt advantage too! If you record the loan against the property (like a second mortgage or deed of trust), it becomes secured debt which gives you stronger tax footing. I learned this lesson the hard way - had a private loan from my in-laws that wasn't recorded against the property. During an audit, the IRS questioned whether it was actually a gift disguised as a loan. Had to produce bank statements showing all the payments made over 3 years to prove it was legit. Now I always record private loans with the county even though it costs a few hundred dollars. The recording fee is worth the peace of mind and stronger tax position.

This is a great question that many real estate investors face! The key thing to understand is that the IRS cares more about the legitimate business purpose of the loan than who the lender is. As long as you're using the money specifically for your rental property investment, the interest should be deductible on Schedule E. A few critical points to keep in mind: 1. **Documentation is everything** - Create a formal written loan agreement that includes the principal amount, interest rate, payment schedule, and maturity date. This doesn't need to be overly complex, but it should look professional and be signed by both parties. 2. **Interest rate considerations** - The rate should be reasonable and at arm's length. You can reference the IRS Applicable Federal Rates (AFR) as a baseline. If the rate is significantly below market, the IRS might view part of it as a gift rather than a legitimate loan. 3. **Keep excellent records** - Track all payments made, maintain copies of checks/transfers, and ensure the lender reports the interest income on their tax return. You'll need to provide the lender's information when you file. 4. **Consider recording the loan** - While not required for deductibility, recording a deed of trust or mortgage with your county can provide additional legitimacy and protection for both parties. The fact that it's family doesn't disqualify the deduction - just make sure you treat it like any other business loan with proper documentation and regular payments according to your agreement.