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Author: mikerm74 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121061  
Subject: Personal Loan Date: 5/17/2001 3:02 PM
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Dear Fools,
I am getting a loan from my parents, and I have a few
questions.
1. Will I have to pay taxes on it since it will
probably look like I just had the money given to me?
I will be paying it back with interest.

2. They are doing me a favor because they are getting
a loan themselves to give me the loan( my credit is too low to
qualify for the amount I need. What are the
implications to this i.e. how will it affect them, and how will it affect me?

Thanks,

Mike (Mikerm74@yahoo.com)
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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 51052 of 121061
Subject: Re: Personal Loan Date: 5/17/2001 4:45 PM
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If it's truly a loan, you should draw up some papers that indicate how much is being borrowed and what the repayment terms are (frequency, term, interest rate, etc.).

You will not have to pay taxes on the loan proceeds. However, your parents will have to pay taxes on the interest they receive from you. You should issue them a Form 1099-INT each year which documents how much interest you paid them that year.

Ira

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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 51053 of 121061
Subject: Re: Personal Loan Date: 5/17/2001 5:39 PM
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irasmilo: "If it's truly a loan, you should draw up some papers that indicate how much is being borrowed and what the repayment terms are (frequency, term, interest rate, etc.).

You will not have to pay taxes on the loan proceeds. However, your parents will have to pay taxes on the interest they receive from you. You should issue them a Form 1099-INT each year which documents how much interest you paid them that year."


Ira, are you sure of the direction? I certainly do not send my mortgage company a Form 1099-INT every year telling them how much interest I paid them that year. In fact, they send me a 1099 every year.

Curiously, JAFO




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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 51055 of 121061
Subject: Re: Personal Loan Date: 5/17/2001 6:01 PM
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JAFO,

Unless I read the original post wrong, this isn't a mortgage, it's a personal loan. The interest which the child pays to the parent in exchange for the parent lending the child the money is income to the parent. Unfortunately, the child cannot deduct the interest since, I assume, the loan is a personal loan and not associated with any business or investment purpose.

It's no different than when you "lend" money to a bank by opening a savings account. The interest they pay you for the privilege of using your money is taxable to you and is reported on a Form 1099.

I just checked the instructions for Form 1099-INT and the child does not have to issue a 1099 to his parents. But the interest is still income which should be reported on their return.

Ira

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Author: phooley Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 51056 of 121061
Subject: Re: Personal Loan Date: 5/17/2001 6:33 PM
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JAFO,

I certainly do not send my mortgage company a Form 1099-INT every year telling them how much interest I paid them that year. In fact, they send me a 1099 every year.

I realize I shouldn't be nit-picky, especially on this board -- most people aren't -- but ... I think what your mortgage company sends you is a 1098 rather than a 1099.

Phooley in Phoenix
(if I had a good doppel I would have used it for this... drat!)

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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 51057 of 121061
Subject: Re: Personal Loan Date: 5/17/2001 7:45 PM
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irasmilo: "Unless I read the original post wrong, this isn't a mortgage, it's a personal loan. The interest which the child pays to the parent in exchange for the parent lending the child the money is income to the parent. Unfortunately, the child cannot deduct the interest since, I assume, the loan is a personal loan and not associated with any business or investment purpose.

It's no different than when you "lend" money to a bank by opening a savings account. The interest they pay you for the privilege of using your money is taxable to you and is reported on a Form 1099."


IRA, I am not at all questioning that it is income to the parents; I was only confused as to who reported what to whom. And while I realzie that it is not a mortgage, a mortgage is basically a loan secured by real property. The mortgage lender lends me the money and I pay the mortgage holder interest. The interest is income to the mortgage lender, but I do not send an annual report to them.

Regards, JAFO




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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 51058 of 121061
Subject: Re: Personal Loan Date: 5/17/2001 10:54 PM
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JAFO,

You don't send a report to your mortgage holder because 1099's are not sent to corporations (among others). See Instructions for Form 1099-INT for who does and does not receive this form.

Ira

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Author: gailkay One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 51108 of 121061
Subject: Re: Personal Loan Date: 5/20/2001 6:23 PM
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You don't send a report to your mortgage holder because 1099's are not sent to corporations (among others). See Instructions for Form 1099-INT for who does and does not receive this form.

And - 1099's are required to be sent only in connection with a trade or business, that's why you don't send your mortgage company a 1099 and why they DO send you a 1098 (loans are <u>their</u> business).

As to your parents' interest expense, if they get a second or an equity line of credit to get the $ to loan to you, then it would be deductible as Qualified Home Mortgage Interest (QHMI).

If they are simply getting an unsecured loan, and if you are paying them interest that they are reporting on their Schedule B as interest income, I would advise them to deduct the interest expense on Schedule A as investment interest expense.

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Author: austexlady Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 51733 of 121061
Subject: Re: Personal Loan Date: 6/11/2001 8:12 PM
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If your parents are doing you this favor because of your credit rating, have you thought about asking them to co sign a loan for you instead? It seems like that would help you build your credit, and let the finance company worry about all the ugly paperwork.
Just a thought.

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