How Do I Report Family Loan Interest on My Taxes?

To report family loan interest on taxes, list the interest you received as ordinary income on Schedule B of Form 1040 with the borrower’s name as the payer, carry the total to line 2b of your 1040, and issue the borrower a Form 1099-INT if the interest paid to you during the year totaled $10 or more. If you charged less than the Applicable Federal Rate, you also have to report the interest the IRS treats you as having received, even though the borrower never actually paid it.

Where the Interest Goes on Your Return

Every dollar of interest a family borrower pays you is ordinary income, taxed at the same rates as wages. Report it on Schedule B (Form 1040) under Part I, “Interest.” Write the borrower’s name in the payer column and the amount you received in the adjacent column.

Schedule B is a required attachment whenever your total taxable interest from all sources exceeds $1,500 for the year.¹ Below that threshold, you still owe tax on the interest and still report it on line 2b of Form 1040; you just skip the separate schedule.

One practical note: report the interest in the year you received it, not the year the borrower’s payment was technically due. If the borrower fell behind and caught up in a later year, the catch-up payments belong on the return for the year they arrived.

When You Must Send the Borrower a Form 1099-INT

You are required to prepare and file Form 1099-INT only when the interest paid to you during the calendar year totals $10 or more.² When the form is required, enter the year’s total in Box 1, “Interest Income.” Both your name, address, and taxpayer identification number and the borrower’s have to appear on the form.

If the interest for the year came in under $10, you skip the 1099-INT entirely. You still report the income on your own return; the $10 rule only excuses the information-return paperwork.

Filing on paper means also submitting Form 1096 as a cover sheet summarizing the information returns you’re transmitting.³ Electronic filers don’t need a 1096. For tax year 2026 returns filed in 2027, the IRS’s electronic portal for information returns is the Information Returns Intake System (IRIS), which replaces the older FIRE system.⁴

1099-INT Deadlines

Three dates matter:

January 31: send Copy B to the borrower so they can prepare their own return.
February 28: file Copy A with the IRS on paper.
March 31: file Copy A with the IRS electronically.

Penalties for Missing the 1099-INT

For returns due in 2026, per-form penalties climb with the delay:⁵

Up to 30 days late: $60 per form.
31 days late through August 1: $130 per form.
After August 1 or never filed: $340 per form.
Intentional disregard: $680 per form, with no maximum cap.

An incorrect taxpayer identification number on the form is treated the same as a late filing, starting at $60.⁵ Separately, if leaving the interest off your own return produces an underpayment of tax, the IRS can add a 20% accuracy-related penalty on the underpaid amount.⁶

Imputed Interest If You Charged Below the AFR

Charging a family member no interest, or a rate below the Applicable Federal Rate (AFR), does not get you out of reporting. The IRS treats the difference between what you charged and what the AFR would have produced as “forgone interest” and taxes you as though the borrower had paid it.⁷ This is sometimes called phantom income: real tax on money you never received.

The AFR the Treasury publishes each month has three tiers based on the loan’s term:⁸

Short-term, three years or less.
Mid-term, more than three years but not more than nine.
Long-term, more than nine years.

For February 2026, the annual-compounding AFR was 3.56% short-term, 3.86% mid-term, and 4.70% long-term. Current figures live on the IRS Applicable Federal Rates page, which links to each monthly revenue ruling.⁹ The rate in effect the month you fund a term loan is the rate you use for the life of that loan.

When imputed interest applies, you calculate what the AFR would have produced for the year and report that amount on Schedule B alongside any interest actually paid. You are not required to issue yourself a 1099-INT for imputed amounts; the reporting happens on your own return.

Exceptions for Smaller Loans

Two statutory relief valves can shrink or eliminate the imputed-interest problem, depending on the total balance outstanding between you and the borrower on any given day.

$10,000 or Less

If the combined balance of all loans between you and the borrower never exceeds $10,000, the imputed-interest rules don’t apply.⁷ You can lend a relative $10,000 interest-free and report nothing from imputation. The exception drops away if the borrower uses the money to buy income-producing assets such as stocks, bonds, or rental property.

$10,001 to $100,000

For gift loans where the total outstanding balance stays at or below $100,000, the imputed interest you must report for the year is capped at the borrower’s actual net investment income for that year.⁷ Net investment income covers items like dividends, interest, short-term capital gains, and royalties. If the borrower’s net investment income for the year is $1,000 or less, it’s treated as zero, and you report no imputed interest for that year. This cap does not apply if one of the principal purposes of the loan is federal tax avoidance.

Once the balance between you and the borrower crosses $100,000, neither exception applies, and imputed interest is calculated on the full forgone amount.

Gift Tax If You Charged Below the AFR

The same forgone interest that shows up as income on your return is also treated as a gift from you to the borrower. For 2026, you can give any one person up to $19,000 in a year without filing a gift tax return.¹⁰ If the imputed gift plus any other gifts you made to that person during the year exceeds $19,000, you have to file Form 709, the United States Gift Tax Return, for the year.¹¹

Filing Form 709 rarely means writing a check. The excess counts against your lifetime exemption, which for 2026 is $15,000,000.¹⁰ Skipping the filing when it’s required can bring penalties and leave the statute of limitations on the gift open indefinitely.

Records to Keep

Hold on to the signed promissory note, every Form 1099-INT you filed, the Schedule B pages, proof of the payments the borrower made, and any Form 709 filings for at least three years after you file the return reporting the income. That’s the standard window for the IRS to assess additional tax.¹² Underreporting income by more than 25% stretches that window to six years, and if a return was never filed there’s no time limit at all. Family loans often run for years, so a workable rule is to keep every loan record until three years after the final payment and the last related return.

1
Internal Revenue Service. About Schedule B (Form 1040), Interest and Ordinary Dividends
2
Internal Revenue Service. Instructions for Forms 1099-INT and 1099-OID
3
Internal Revenue Service. About Form 1096, Annual Summary and Transmittal of U.S. Information Returns
4
Internal Revenue Service. Filing Information Returns Electronically (FIRE)
5
Internal Revenue Service. Information Return Penalties
6
Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments
7
Office of the Law Revision Counsel. 26 USC 7872 – Treatment of Loans With Below-Market Interest Rates
8
Office of the Law Revision Counsel. 26 USC 1274 – Determination of Issue Price in the Case of Certain Debt Instruments Issued for Property
9
Internal Revenue Service. Applicable Federal Rates
10
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026, Including Amendments From the One, Big, Beautiful Bill
11
Internal Revenue Service. Instructions for Form 709
12
Internal Revenue Service. How Long Should I Keep Records?