If an individual makes an unsecured investment/loan (such as a simple promissory note), is the interest for that loan tax deductible for the recipient/borrower?
Again, this loan would not be secured by a specific piece of real estate - so it wouldn’t be a “mortgage”. I’m assuming that the lender would have to show the interest as income, but is that same interest deductible for the borrower in these circumstances?
Thanks for the help.
Depends upon the purpose of the loan.
It would also depend upon the borrowing entity. An individual probably would not be able to deduct the interest, but a business on the other hand likely would. Devil is in the details.
Thanks for the responses.
“Depends on the purpose of the loan”. If the purpose is to purchase (and then subsequently manage) investment properties - would the interest be deductible then?
I do have an LLC, so I should have the LLC borrow the money rather than myself as an individually?
If the property you purchase is held as a rental, then the interest is deducted on Schedule E (1040). If the property you purchase is held as an investment but not used as a rental (vacant land for example), then the interest is deducted on Schedule A (1040) as investment interest but only if you itemize.
Thanks for the response.
So if the property to be purchased will be used as a rental, then the loan interest CAN be deducted? Is this still true if the loan WILL NOT be secured by a piece of real estate?
Does it matter if the borrower is an individual or LLC?
Thanks again.
a company can deduct the interest it pays to just about anybody for any reason.
an individual can deduct interest on a mortgage, payable either to an individual or a mortgage co.
the above mortgage interest may be on a residence or rental, and where/how the interest is treated differs, but both are deductible somewhere.
an individual can also deduct investment interest (interest on money borrowed to invest), but there are some limits.
From your post it is difficult to tell exactly what you have in mind.
I would edit Mark’s comment above to something more like this…
"a company can deduct the interest it pays to just about anybody for any good business reason.
yeah, what he said.