To report interest on a family loan, put it on Schedule B of your Form 1040, listing your relative’s name as the payer and the amount you received. The IRS treats you as a lender earning taxable interest income, the same as if the money had come from a bank. If you charged less than the government’s minimum rate, or nothing at all, you may also owe tax on interest you never actually collected. You generally don’t need to send anyone a Form 1099-INT.
Where the Interest Goes on Your Return
All interest income from a family loan is reported in Part I of Schedule B (Form 1040). Enter the borrower’s name as the payer and the total interest received next to it. That total flows to line 2b of your Form 1040 and becomes part of your adjusted gross income.
Filing Schedule B is mandatory when your total taxable interest from all sources exceeds $1,500 for the year. Below that, the interest still gets reported on line 2b, but the separate schedule isn’t required. Either way, both the actual interest the borrower paid you and any imputed interest (explained below) belong on the same line.
You Don’t Need to File Form 1099-INT
The IRS instructions for Form 1099-INT contain a specific exemption: you are not required to file a 1099-INT for interest paid on a loan issued by an individual. Because you’re a person lending to a family member rather than a bank or financial institution, that exemption covers you. You report the interest on your own return; you don’t send one to the borrower or to the IRS.
Do You Have to Report Interest You Didn’t Receive?
Sometimes, yes. If you lent money at a rate below the Applicable Federal Rate for the month you made the loan, the tax code treats the shortfall as “imputed” interest and expects you to report it as though you had collected it.
The rule comes from 26 U.S.C. ยง 7872, which treats a below-market family loan as two simultaneous transactions. You are deemed to have given the borrower a gift equal to the forgone interest, and the borrower is deemed to have paid that same amount back to you as interest. The interest side of that fiction lands on your Schedule B.
Applicable Federal Rates
The IRS publishes AFRs each month in Revenue Rulings. The rate you use depends on the length of the loan:
- Short-term (3 years or less). For February 2026, the annual compounding AFR is 3.56%.
- Mid-term (more than 3 years, up to 9 years). For February 2026, the annual compounding AFR is 3.86%.
- Long-term (more than 9 years). For February 2026, the annual compounding AFR is 4.70%.
For a term loan (fixed payoff date), the rate that applies is the one published for the month you made the loan. For a demand loan (callable at any time), the rate is applied for each period during which the loan is outstanding.
Two Carve-Outs That May Excuse You
The $10,000 de minimis exception. Loans of $10,000 or less between individuals are completely exempt from the imputed interest rules, so long as the borrower does not use the money to buy or carry income-producing assets like stocks or rental property. If your outstanding loans to a family member stay at or below $10,000 on every day of the year, you can skip the imputed interest calculation.
The $100,000 net investment income cap. For loans between $10,001 and $100,000, the imputed interest you owe tax on is capped at the borrower’s net investment income for the year. If your daughter borrowed $80,000 and earned only $400 in dividends and interest that year, your imputed interest income is limited to $400. If her net investment income is $1,000 or less, it’s treated as zero, meaning you owe no imputed interest at all. This cap disappears once the outstanding balance exceeds $100,000, and it doesn’t apply if a principal purpose of the loan arrangement is tax avoidance.
Running the Imputed Interest Math
If your loan exceeds the $10,000 threshold and you charged below the AFR, the calculation goes like this. Take the loan balance outstanding during the year, multiply it by the AFR for the applicable term, and that gives you the interest the IRS expects. Subtract whatever interest the borrower actually paid you. The difference is your imputed interest.
Add that imputed amount to the actual interest received, and report the combined total on Schedule B. For loans between $10,001 and $100,000, check whether the borrower’s net investment income limits the imputed amount, and if it does, report only the capped figure. Keep a worksheet showing your calculation in case the IRS asks how you arrived at the number.
A quick example. You lend a relative $50,000 for five years at 1% when the mid-term AFR is 3.86%. The IRS expects interest as though you charged 3.86%. The gap between your 1% rate and the AFR is your imputed interest, and it goes on Schedule B alongside the actual 1% you collected.
Documentation That Supports What You Report
The biggest risk with a family loan isn’t the interest calculation. It’s the IRS deciding the whole arrangement was never a loan at all, reclassifying it as a gift, and treating the entire principal as taxable. A handful of records prevents that.
Have a written promissory note signed by both parties. It should spell out the principal amount, the interest rate (at or above the AFR if you want to avoid imputed interest), the repayment schedule, and what happens if the borrower misses payments. Keep copies of every payment the borrower makes, whether by check, bank transfer, or electronic deposit. A paper trail of actual repayments is the strongest evidence that a real lending relationship exists.
You’ll also need the borrower’s Social Security Number or Taxpayer Identification Number. The IRS requires a TIN on tax-related documents so it can match income reported by one taxpayer against obligations claimed by another.
Gift Tax Side Effects
When you lend money below the AFR, the forgone interest is also treated as a gift from you to the borrower. For 2026, the annual gift tax exclusion is $19,000 per recipient. If the imputed interest on your loan stays below that amount, you won’t owe gift tax or need to file a gift tax return for the interest portion alone.
Large, long-term, zero-interest loans are where this bites. The annual forgone interest can exceed $19,000, which triggers a requirement to file Form 709 and can eat into your lifetime gift and estate tax exemption. Reporting the imputed interest on Schedule B does not satisfy the separate gift tax filing obligation; they are two different returns handling two sides of the same deemed transaction.
Penalties for Skipping the Reporting
Informal family arrangements are not invisible to the IRS. If you fail to report imputed interest or actual interest received, and the resulting understatement of tax is substantial, the IRS can impose an accuracy-related penalty equal to 20% of the underpayment. An understatement is “substantial” when it exceeds the greater of 10% of the tax that should have been shown on the return or $5,000. On top of the penalty, you’ll owe the unpaid tax plus interest calculated from the original due date.
The larger exposure is reclassification. When there’s no promissory note, no repayment history, and no interest being charged or reported, the IRS can treat the entire loan as a gift. That means potential gift tax on the full principal, not just the interest, and that’s a much bigger number than any imputed interest you were trying to avoid reporting.