How do I avoid paying tax a private loan return?

3 Replies

Hello all,

A few years ago I let my friend borrow 40k for a real estate project.

A good portion of those funds are being returned to me this year.

Is there anything I need to do specifically with the IRS to avoid paying taxes again on these funds?

If it was in fact a loan then it's simply a return of the loaned funds which would not typically be taxable (just a return of after tax dollars). 

What were the interest terms on the loan? Any interest received will be taxable.

The loan was a fixed 8% interest which has been returned over the last few years on a monthly basis that I have paid my tax on. 

If it is a return on loan, is it up to my friend to deduct those payments as loan return with the IRS or I'm wondering how the IRS would know it is a return of loan?