Repayment of a personal loan considered "earned Income"

[tjloven]

We bought our son's house when he got divorced, so he would not lose it.  We paid cash for it.  He pays us on a monthly basis for this personal loan.  The loan is at zero percent interest.  Is the repayment considered earned income to us for tax reporting purposes?

[xmasbaby0]

No.   "Earned" income is income you received for working.  

[tjloven]

Thank you.

[JohnB5677 · Accepted solution]

No, the principal that he pays back is not taxable; however, as far as the IRS is concerned, there is no such thing as an interest-free loan. 

1. Loans without interest, or at below-market interest rates, are recharacterized so that the lender must recognize market-rate interest income.
2. Therefore, you will have to pay taxes on the fair market rate, even though your son did not pay any interest.
3. You will have reportable income, but it will not be earned income.

IRS Tax Rules for Imputed Interest

[Opus 17]

Technically, you must report interest income equal to the interest he would have paid you if you charged interest that was at least the applicable federal minimum interest rate when the loan was made, even if you did not charge interest.  This is called imputed interest.  How likely will you get caught if you don't, I couldn't say.  And imputed interest, even if you report and pay tax on it, is not earned income.