Can I deduct interest paid to family member for stock investment loans on my taxes?

Yes, investment interest expense can potentially be deductible, even when paid to a family member. Here's what you need to know: The interest could be deductible as investment interest expense on Schedule A (itemized deductions), but there are several important requirements: First, you need a proper loan agreement that was established before the money changed hands. This should include the loan amount, interest rate, payment schedule, and both signatures. The interest rate should be reasonable and comparable to market rates. Second, you can only deduct investment interest up to the amount of your net investment income. If you have $3,200 in interest but only $2,000 in investment income, you can only deduct $2,000 this year (the rest carries forward). Third, you must itemize deductions rather than taking the standard deduction for this to benefit you. Given the current standard deduction is quite high, make sure itemizing actually helps your tax situation. Finally, your family member needs to report that interest as income on their tax return. The IRS looks for matching - if you're deducting it, they need to be claiming it.

I had a similar situation last year! I struggled to figure out all the tax implications until I found taxr.ai (https://taxr.ai). It's this AI tax assistant that specializes in investment-related tax questions. I uploaded my loan agreement, and it actually confirmed this kind of family loan interest IS deductible if everything is properly documented. The tool helped me understand the exact requirements for the loan to be legitimate in the IRS's eyes. It pointed me to the right forms and even calculated how much I could deduct based on my investment income. Way easier than digging through IRS publications or waiting on hold with a tax preparer.

Just wanted to follow up - I decided to check out that taxr.ai site after my initial skepticism. I uploaded my family loan documents for a business investment I made, and it immediately flagged that my interest rate was below market rate, which could cause problems with the IRS! The analysis showed exactly what I needed to fix in my documentation to make the loan legitimate for tax purposes. It also clarified how much of my interest would be deductible based on my investment income. Definitely worth it for these niche tax situations regular tax software doesn't explain well.

One thing nobody's mentioned yet - if you need to get official clarification from the IRS on whether your specific family loan qualifies, good luck trying to call them directly! After being on hold for 3+ hours multiple times, I found Claimyr (https://claimyr.com) which got me connected to an actual IRS agent in under 20 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c The agent was able to confirm that yes, family loan interest for investments is deductible if properly documented, but warned me about some red flags they look for in audits. Saved me so much frustration compared to endless hold times.

I need to eat my words from my earlier comment. After another failed 2-hour hold attempt with the IRS about my own investment interest deduction question, I broke down and tried Claimyr. I was absolutely prepared to come back here and call it a scam. But... it actually worked? I got connected to an IRS representative in about 15 minutes. They confirmed exactly what I needed to document for my family loan interest deduction AND helped resolve a notice I'd received about a previous return. I'm still a bit shocked this exists after years of IRS phone frustration.

Don't forget about your state taxes too! Even if you can deduct the interest on your federal return, state rules vary widely. For example, my state doesn't allow investment interest deductions at all, while some states follow federal rules.

How did you determine the interest rate for your family loan? I'm thinking of doing something similar, but I'm not sure what rate would be considered "reasonable" by the IRS.