Is the interest on a personal loan tax deductible?

Federal tax treatment of personal loan interest: Unlike mortgage interest (deductible within limits under IRC Section 163) and student loan interest (partially deductible for borrowers under income thresholds), personal loan interest for consumer purchases is not deductible under the Internal Revenue Code. This has been the rule since the Tax Reform Act of 1986 eliminated consumer interest deductions.

Business use exception: If you use a personal loan to fund a sole proprietorship, freelance business, or rental property, the interest allocable to that business use is deductible as a business expense. For example: you take a $20,000 personal loan and use $15,000 for your freelance photography business (equipment, software) and $5,000 for personal use. You can deduct 75% of the interest paid on Schedule C. You must track the use of funds and keep clear records. The allocation must be based on actual documented use, not estimated.

Investment use exception: Interest on money borrowed to buy taxable investments (stocks, bonds) is deductible as investment interest expense on Schedule A, but only up to your net investment income for the year. Most investors do not itemize, and the AMT can further limit this benefit. This exception is rarely useful for personal loan borrowers.

Self-employed use: If you use a personal loan for legitimate business purposes and are self-employed, the interest is deductible regardless of whether you itemize. This is the most practical exception for the majority of borrowers who see personal loan interest as potentially deductible.