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What to consider before lending money to family and friends
When your best friend views your
nest egg as a source of start-up funds for his latest business venture, or your
nephew hits you up for a car loan, your first impulse may be to reach into your
bank account to help. But it's a fact that loans to family and friends often
end up straining both finances and relationships. As Shakespeare said,
"Loan oft loses both itself and friend." In other words, if you lend
money to friends, you often don't get paid back, and the friendship itself may
disintegrate.
It's best to consider a loan to
someone you love as an "arm's length" transaction. If you're
pondering such a loan, keep the following in mind:
* You can just say "no."
It's your money, after all. Do you really want to raid an emergency fund or dip
into your child's college account to finance a friend's business idea? Think
like a bank. It's reasonable to ask tough questions about the person's bank
accounts, potential sources of income, planned use of loan proceeds, and
spending habits before extending credit.
* Consider a gift. If you're
comfortable sharing your resources, you may want to provide a monetary gift
with no strings attached. In many cases, this is the best solution because
neither you nor your friend expect the money to be paid back. Unlike a loan, this
type of arrangement can forestall misunderstandings and hurt feelings later on.
Of course, you should not give money if doing so would unduly strain your own
finances.
* Formalize loans. If you decide to
lend more than a small amount to a friend or family member, it's generally best
to draft a written agreement. This can be as simple as filling out a promissory
note (available online or at office supply stores). Such forms spell out the
basic terms of the loan -- amount, interest rate, payback period -- and provide
some limited protection should you and the borrower end up in small claims
court. Another recent innovation is the use of direct lending (also called
social lending or peer-to-peer lending) websites to facilitate loans between
family and friends. For a fee, such sites can prepare loan documentation, send
payment reminders, issue regular reports, even facilitate electronic fund
transfers. If the loan involves a significant amount of money, check with your
attorney.
Remember: Many personal relationships
have been damaged when loans go awry. So proceed with caution.
Posted in tax
Hi guys, this is Noel Dalmacio, your ultimate CPA at lowermytaxnow.com
How do you maximize tax breaks for your vacation home?
If you own a vacation home, a boat or an RV that you also rent out to others, keep track of the rental use during the year to maximize your tax breaks.
Here are some tax strategies you need to consider:
Number 1. Receive tax-free income. Yes! You heard it right!
If you rented it out for 14 days or less during the year, you don't have to report the income. You get tax-free income!
You can generally deduct mortgage interest and real estate taxes, but you can't deduct any other rental expenses. Hey, tax-free income is still great stuff!
Number 2 - Limit your personal use so you can deduct all your rental expenses.
If you limit your personal use to NOT more than 14 days or 10% of the time the home is rented, all rental expenses are deductible.
However, conversely, number 3* If you use the property personally for more than 14 days or 10% of the number of days it's rented, the rules change. Your rental deductions (except for taxes and mortgage interest) are limited to the amount of your rental income.
So here’s an example: You stayed in your vacation home 20 days last year. It was rented at fair market value for 190 days. In this example, your personal use exceeded the 10% limit (19 days). Therefore, your rental deductions are limited to the rental income you received.
Number 4. Convert the property as your primary home, and the gain when you sell may be tax-free. If you use your vacation home as your principal residence for two out of the five years before you sell it, you may exclude up to $250,000 of gain ($500,000 for married couples) from your income. However, you will have to pay tax on gain to the extent of certain depreciation you previously taken after May 6 , 1997 and you might need to allocate the gain on sale between the primary home and the rental.
The rules are a little bit complex, but a basic understanding of the rules and good recordkeeping will help you get the best tax breaks from your vacation home.
If you like to learn more, click the link lowermytaxnow.com and subscribe to my weeklyblog.
Until then, this is Noel Dalmacio, your ultimate CPA at lowermytaxnow.com
Last Updated by Admin on 2015-07-15 05:24:57 PM