The Internal Revenue Service considers interest you receive from personal loans as taxable income regardless of whether or not the borrower can deduct the interest from his taxes.
Every dollar of interest you collect must be included on your tax return. The interest is taxed as ordinary income, which is how most other income, such as your salary and self-employment earnings, is taxed.
Interest from a personal loan is always reported on the “Taxable interest” line of your return. But if your total interest income for the year – not just the interest collected on the loan – is more than $1,500, you'll need to report it on a Schedule B attachment to your return. Schedule B just requires some of the details surrounding your interest earnings. For the personal loan, this means you'll need to enter the borrower's name and the total amount of interest you collected from him.
Because the line of credit, is on a rental property, it does not qualify as home mortgage interest .
Also, If the line of credit was used for personal purposes, it is not deductible against rental income.
Your reporting requirements to the IRS are pretty straightforward. Any interest received from a personal loan must be included as ‘Interest Income’ A clear record of payments made and a signed promissory note can help a lender prove that the transaction was a legitimate loan . The interest is an integral part of any note payable.
