Family loan interest and your taxes: 1099-INT, 1098, and where it all goes

Is family-loan interest taxable? Yes — to the lender

Interest collected on a loan to a family member is ordinary taxable income to the lender, exactly like interest from a bank account. It lands on Form 1040 line 2b, and per the Schedule B instructions, Schedule B itself is required once total taxable interest and ordinary dividends pass $1,500 for the year — and in some situations regardless of the amount, including interest from a seller-financed mortgage (more on that below).

Two points trip people up every April:

• No form is needed to make it taxable. Most family lenders never receive a 1099-INT for the interest, because nobody was required to send one. The income is reportable anyway, from the lender's own records.
• The borrower usually gets no deduction. Personal interest — on a loan for a car, debt consolidation, or general help — is generally not deductible. The big exception is a loan properly secured by the borrower's home, covered in the house section below. So on most family loans the interest is taxed once, on the lender's return, with nothing offsetting it on the borrower's.

Does the lender issue a 1099-INT? Generally not

Form 1099-INT is the payer's form — banks send it because they paid you interest. On a family loan, the interest payer is the borrower, and under the IRS instructions for Form 1099-INT, the filing requirement applies to interest paid in the course of a trade or business. A child paying interest on a personal loan from a parent isn't operating a trade or business, so in the ordinary family-loan case no one is required to file a 1099-INT in either direction.

The boundary to watch: if the loan funds the borrower's business and the borrower deducts the interest as a business expense, the payment may now be "in the course of a trade or business," and an information-return obligation can attach. The clean summary — worth confirming with a CPA for any business-purpose loan:

• Personal loan between individuals: generally no 1099-INT required; the lender still reports the interest as income.
• Loan into a borrower's business: the borrower (or the business) may need to issue one — ask a professional before assuming otherwise.

The house case: seller-financed and private mortgages

Home loans are where family-loan taxes get interesting, because it's the one case where the borrower may get a deduction — and where the IRS makes both sides identify each other by name and Social Security number.

When the borrower can deduct the interest

Under IRS Publication 936, home mortgage interest is deductible only if the debt is secured by the home — a mortgage, deed of trust, or land contract that is "recorded or is otherwise perfected" under state law — and only up to the acquisition-debt limit ($750,000 for debt taken out after December 15, 2017; $375,000 married filing separately). A handshake loan from Mom "for the house," with nothing recorded against the title, is personal interest: the lender pays tax on it and the borrower deducts nothing. If the family is lending for a home purchase, recording the security instrument is what unlocks the deduction — the family-loan-for-a-house guide walks through the setup.

Form 1098: the private lender generally doesn't file one

Banks send Form 1098 to report mortgage interest received. The Form 1098 instructions require it only for interest of $600 or more received in the course of a trade or business — and give exactly this example: if you hold the mortgage on your former personal residence and the buyer makes payments to you, "you are not required to file Form 1098."

The paper trail the IRS wants instead

With no 1098 in the picture, the two tax returns identify each other directly. For a seller-financed home (you bought the home from the person you pay interest to), the Schedule A instructions have the borrower deduct the interest on line 8b — "home mortgage interest not reported on Form 1098" — and write the lender's name, identifying number (an SSN for an individual), and address next to it, while also giving the lender the borrower's own SSN. The Schedule B instructions mirror it on the lender's side: report the interest in Part I and "show the buyer's name, address, and SSN." Skipping the identification runs a $50 penalty on either side, and the matched SSNs are how the IRS cross-checks that the deduction on one return shows up as income on the other.

For a private mortgage that isn't seller-financed — a parent lends the cash and records a mortgage while the home is bought from a third party — the deduction still rides on the secured-and-recorded requirement, and the interest still goes on Schedule A line 8b since there's no Form 1098. The formal name-and-SSN exchange above is written for the seller-financed case; how much identifying detail to attach in other private-mortgage situations is worth a preparer's judgment.

The tax-software trap: no FEIN, no problem (really)

Here's the moment that fills tax-forum threads every spring: the borrower opens the mortgage-interest interview in consumer tax software, and it asks for the lender's federal EIN — which a private lender doesn't have. The wrong move is inventing a number or borrowing one from an old bank 1098.

The vendors' own guidance covers this. TurboTax's support flow for mortgage interest lets you indicate that no Form 1098 was received and then enter the lender as an individual — name, address, and SSN instead of an EIN — which is precisely what Schedule A line 8b wants. On the lender's side, the interest interview typically has a dedicated seller-financed-loan path that collects the buyer's name and SSN for Schedule B. Interview screens get reshuffled every filing season, so the reliable anchor is the destination, not the clicks: borrower's interest on Schedule A line 8b with the lender identified; lender's interest on Schedule B Part I with the buyer identified. If a program truly won't accept an SSN where it demands an EIN, that's a question for the vendor's support or a human preparer — not a reason to fabricate a number.

Imputed interest: when you charged too little

Everything above assumes real interest is charged. Charge less than the IRS minimum and Section 7872 fills in the difference. Under the below-market-loan rules in IRS Publication 550, the interest you didn't charge (the "forgone interest") is treated as if the lender gave it to the borrower — a gift — and the borrower paid it back as interest. The result is the worst of both worlds: the lender reports phantom interest income that was never received, and makes a gift at the same time.

The minimum is the Applicable Federal Rate. For July 2026, Rev. Rul. 2026-12 sets the annual-compounding AFRs at 4.00% short-term (terms up to 3 years), 4.35% mid-term (over 3 up to 9 years), and 4.98% long-term (over 9 years). The IRS updates AFRs monthly — check the current AFR page before signing a note.

Two escape hatches soften the rules for family loans, per Publication 550:

• $10,000 de minimis: gift loans between individuals totaling $10,000 or less are generally exempt, as long as the money isn't used to buy income-producing assets.
• $100,000 rule: for gift loans of $100,000 or less, the forgone interest taxed to the lender is capped at the borrower's net investment income — and if that income is $1,000 or less, it's treated as zero. The gift side of the analysis still applies, and neither exception is available where tax avoidance is a principal purpose of the loan.

On the gift side, forgone interest counts against the annual gift-tax exclusion — $19,000 per recipient in 2026, $38,000 for a couple splitting gifts — before touching the roughly $15,000,000 lifetime exclusion, with gift-tax rates running 18–40% beyond that. The Imputed-Interest Calculator puts numbers on a below-market rate, and the intra-family loans guide covers the full loan-versus-gift framework.

What records to keep

Every number in this guide comes from the lender's own records, because no bank is producing them. The file that makes tax season painless:

• The signed promissory note — the free Promissory Note Generator produces an editable one from your terms.
• The amortization schedule — the agreed split of every payment into interest and principal.
• A payment log — date, amount, and running balance for each payment actually made, matched against the schedule.
• A year-end interest total — the single number both returns need: interest income for the lender's Schedule B, and (for a secured home loan) the borrower's Schedule A line 8b deduction.
• The recorded security instrument, for home loans — it's the borrower's deduction.
• The gift ledger, if any part of the loan is ever forgiven — forgiveness is a gift in the year it happens, and belongs on the same running ledger as every other gift. The loan-forgiveness guide covers the mechanics, and the free Gift Ledger keeps the running record.

This is the bookkeeping Family Matters exists to do. Only you lend the money. Family Matters documents the note and logs every payment — it never lends or fronts a dime. Payments logged against the schedule through connected accounts become a CPA-ready year-end interest summary for both sides, and if a loan is later forgiven, the forgiven amount flows straight onto the family's gift ledger and into a draft Form 709 worksheet for the preparer.

A worked example: $200,000 home loan at 4.98%

Illustrative numbers — run your own through the Family Loan Calculator for the exact schedule.

A parent lends a daughter $200,000 toward a home in July 2026, structured as a 30-year amortizing note at 4.98% — the long-term annual AFR for that month — with a mortgage recorded against the property. The monthly payment is about $1,071, and roughly $9,900 of the first year's payments is interest.

• The parent (lender): reports roughly $9,900 of interest income on Schedule B, taxed at ordinary rates. No 1099-INT and no Form 1098 are required of anyone — the number comes from the payment log.
• The daughter (borrower): because the note is secured by the home and recorded, the interest is potentially deductible home-mortgage interest — if she itemizes rather than taking the standard deduction. With no Form 1098, it goes on Schedule A line 8b; if the home had been bought from the parent, her return would also carry the parent's name, SSN, and address.
• The asymmetry to notice: had the same loan been left unsecured, the parent's tax bill would be identical — and the daughter's deduction would be zero. On a large home loan, the recording step is worth real money.

Common questions about family-loan taxes

This guide is general information, not tax, legal, or financial advice. AFR and gift rules change; verify current figures with the IRS and consult your CPA or attorney before structuring a loan.