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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
Imagine your rich parent or relative gives you a real estate property, vacant lot or stocks. And then a number of years later, your parent or relative dies and you decide to sell the gift. Your tax preparer says you'll need to calculate capital gains on the sale, and asks for your basis to offset it with the sale. So here’s the question: “What's your basis?”
Hello, this is Noel Dalmacio, your ultimate CPA at lowermytaxnow.
Basis is the amount of capital investment in the property which is commonly called the purchase costs. So when you sell a property or stocks received as a gift, the general rule is that your basis is the donor's cost basis or purchase costs. So if you sell it for a gain, you need to use the donor’s basis or costs. But if you sell at a loss, your cost is the lower of the donor's basis or the fair market value on the date you received the gift.
But without cost records, you have no way of proving the donor's basis and no way of saving yourself tax dollars.
So what do you do? So next time, when you receive a gift, explain why you need the cost basis to make the conversation less awkward. No one likes to pay unnecessary taxes. So I recommend having the same conversation about the cost of valuable gifts you received in prior-years. That’s very important!
Now conversely, if you're the gift-giver or the one giving the gifts, offer the additional gift of presenting the cost records to your recipient at the same time. Otherwise, you may end up giving an unintended gift to the IRS in the form of…unnecessary taxes.
There you have it. So next time, when you receive a valuable gift like a property, vacant lot or stocks, ask and inquire about the cost records so that at the time of sale, you will avoid unnecessary taxes.
If you like to learn more, click the link lowermytaxnow.com and sign-in to receive my weekly blog.
Until then, this is Noel Dalmacio, your ultimate CPA at lowermytaxnow.com.
Last Updated by Admin on 2016-12-02 09:45:21 PM