Private party Interest income/expense

[GCK]

As an individual, I have made a loan to a small business llc.  It is documented with note at market interest rates.  I have also taken out a loan against my insurance policy for which I will be paying interest.  Will I be able to take the interest expense I incur against the interest income from the loan I made with the llc, within the context of a personal tax return?

GCK

[MaryK4]

Yes, you can generally deduct the interest paid on your life insurance loan as an investment interest expense to offset the interest income from your loan to the LLC, provided you meet certain IRS tracing and reporting requirements. 

NOTE:

• You must be able to document that the funds from your life insurance loan were used specifically to make the income-producing loan to the LLC.
• This is an itemized deduction claimed on Schedule A; it is not a direct "above-the-line" subtraction from your interest income.
• Your deduction is limited to your total net investment income for the year (which includes the interest from the LLC loan).
• Any interest expense that exceeds your investment income cannot be deducted this year but can be carried forward to future tax years.

[GCK]

Thanks,  I presume I should issue a 1099 or 1098 to the llc if over the minimum reporting requirement?

GCK

[PatriciaV]

Yes, documenting the interest you receive by issuing Form 1098 will be proof of your intention regarding this loan.