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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 general
Hello, this is Noel Dalmacio, your ultimate CPA at lowermytaxnow.
Do you have a rental property that appreciated in value that you want to sell?
You want to pull the trigger but you are afraid of the tax you will be paying on the gain. What can you do?
Millionaire investors used this strategy to build their real estate portfolio. It’s one of the most powerful tax savings strategies available to you. It’s called: 1031 exchange.
A 1031 exchange allows you to postpone your taxes by exchanging up to another higher-priced rental property. It’s a way to consolidate and build your real estate investments without paying taxes. It’s a two-step process: first step, sell your property, second step, reinvest the cash proceeds in a new property.
Here are 6 additional things you need to know about 1031 exchanges:
- Must be investment property (enter in slide) - It’s only for rental, investment or business property.
- 45-day rule (enter in slide) - Replacement property must be identified within 45 days of the sale of the old property. There are no extensions allowed.
- 180-day rule (enter in slide) - It must also be purchased within 180 days of the sale of the old property.
- Qualified intermediary requirement (enter in slide) - To qualify for the tax deferral, you must hire a qualified intermediary (commonly called an exchange accommodator or QI).
- Cash receipt is taxable (enter in slide) – Any cash you received or taken out during the exchange is taxable.
- Consider mortgages and other debt (enter in slide) – If you don’t receive cash back but your mortgage balance went down, that will be treated as income. For example, you had a mortgage of $500,000 on the old property, but your mortgage for the new property is only $400,000. You have a $100,000 of taxable income. (show slide)
To recap, a 1031 exchange is a very powerful tool, that if you use wisely, can save you thousands of dollars come tax time.
However, you have to pay strict attention to the rules of qualification. Otherwise, you could find yourself in some trouble with the IRS.
Until then, this is Noel Dalmacio, your ultimate CPA at lowermytaxnow.
Last Updated by Admin on 2016-06-16 12:50:30 AM