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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.
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Are you planning to buy a new home? Are you thinking of refinancing your mortgage? Or taking out a home equity line of credit? If you answered “yes” to all the questions, then it’s important for you to know the new tax law regarding mortgage interest deduction.
Hello, this is Noel Dalmacio, your ultimate CPA at LowerMyTaxNow.
Here are seven things you need to know about the new mortgage interest deduction:
- Effective date - any loan started after 12/15/17.
- New 2018 tax law - you can deduct interest for up to $750,000 in new mortgage debt for your first and second home. Under prior law, you can deduct mortgage interest on $1 million of home debt and $100,000 of home equity debt.
- Couples filing separately - each spouse can claim $375,000 in mortgage interest deductions.
- Grandfathered debt - any mortgage loan you entered before 12/15/17 will allow you to claim interest up to the $1 million ($500K for married couples filing separately) for your first and second home.
- Mortgage refinancing - you can deduct your mortgage interest if you refinance your mortgage debt up to $1 million on or before 12/15/17. But the new loan can’t exceed the amount of the current mortgage being refinanced. Example - If you have a $1 million mortgage and you paid it down to $700,000, then you can refinance it up to $700,000 of debt and continue to deduct interest on it. If you refinance it for $900,000 and you use $200,000 of cash to upgrade your home, then you could also deduct the interest on $900,000. But if you refinance for $900,000 and simply pockets $200,000 of cash, then you could deduct interest only on the $700,000 of refinancing.
- Home equity line of credit (HELOC) debt - interest on a HELOC is only deductible if the loan proceeds are used to make substantial improvements to your home, and the combined total of the first mortgage and home-equity line of credit or second mortgage does not exceed $750,000.
- State conformity - determine if your resident state agrees with the federal law. For example, in California, you can still deduct mortgage interest on $1 million of home debt and $100,000 of home equity line of credit (HELOC) debt.
There you have it. Those are the seven things you need to know about the new mortgage interest deduction.
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 2018-05-31 10:25:59 PM