Loan repayment going towards mortgage

[BJ Butler]

In the last 3yrs, I have loaned a couple some money that has totaled approx $15,000. This includes cash and items charges to my credit card on their behalf. Yes, we have a contract and I keep the receipts. As we approach the repayment portion time, I was reminded I would probably have to pay taxes for anything over $10,000 that is given to me. They will be able to pay all this back with one check. With all the interest I will have accrued, my total balance will probably come to $20k. My question is this, instead of accepting cash then paying taxes on it (which is a lost on my end), am I able to have the couple just pay this large sum of money towards my mortgage? By doing this, it would allow me to refinance my home, take out a larger HELOC, & I remain within my legal rights as well as ethical. BP, your thoughts please.

[Paul Allen]

If you loaned them $15K and they repay you $20K, then you have earned $5K of interest income, and it is required to be reported as such.  Repayment of the principal (the $15K) is not income to you, just the interest.

Your idea to avoid taxes by accepting payment in other than cash does not change the fact that the interest received is income to you. 

Good Luck!