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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 own a rental property where you have “used up” most or all of your depreciation? You want to sell the old property and buy a new one so you can start benefiting from the depreciation deduction again. You’re thinking: Can I do that? Answer: Absolutely!
Here are 3 tax strategies that you can use:
1. Take advantage of the suspended rental losses – if your income is more than $150K, the IRS will suspend your current rental losses and will be carried over to future tax years indefinitely (exception applies for RE professional). Any carried-over rental losses not used can be claimed if your income will permit or fully expensed during the year you sell the property to offset potential capital gains.
2. Key tax rate – if you are in the 10%-15% tax bracket and you held the rental for more than a year, then you can pay “0” capital gains rate. Yes! You heard that right…zero! The key here is proactive planning. Make sure you postpone some income and increase your deductions in order to be in 10%-15% tax rate.
3. Installment sale – you can spread and report the capital gains over a number of years in order to spread the tax and create a future revenue stream.
To recap, take advantage of the strategies above so you can minimize or spread your taxes and start getting the tax benefits from depreciation deduction again.
Until then, this is Noel Dalmacio, your ultimate CPA at lowermytaxnow.
Last Updated by Admin on 2016-06-22 06:37:15 PM