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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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Did you own a home with your spouse when she was still living? And were you planning to sell your home but you were wondering if you can claim the capital gain exemption?
Hello, this is Noel Dalmacio, your ultimate CPA at LowerMyTaxNow.
In order to claim the $500,000 capital gain exemption on the sale of your home, the sale needs to happen within two years from your spouse’s date of death. You also need to meet the three requirements below:
- Either you or your deceased spouse must have owned the property for at least two years before your spouse‘s death.
- The couple must have lived in the home for at least two years prior to the death of the spouse.
- The capital gain exemption must not have been claimed by either spouse in the two years before death.
Example: Joe and Jackie are married and have owned and used their home since January 1, 2000. On January 1, 2018, Jackie passed away. If Joe sells the home before January 1, 2020, he will qualify for the $500,000 capital gain exemption.
Here’s one tax trap that you need to be aware of – this rule will not apply if you decide to remarry before the sale of your home within the two-year period. So watch out!
That’s all I have for today. So make sure that you meet all the tax requirements so you can claim the exemption when you sell your home after your spouse’s death.
Until then, this is Noel Dalmacio, your ultimate CPA at lowermytaxnow.com.
Last Updated by Tax on 2018-07-31 06:47:51 PM