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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 tax
In a "2013 Summertime Tax Tip," the IRS reminded
taxpayers about the current rules on home sales. Here's a quick review of those
rules.
Tax Free Home Sale
The tax law allows the majority of taxpayers who sell their
homes to enjoy 100% tax-free profit from the sale.
If you have owned and used your home as your principal
residence for at least two of the five years preceding the sale, you may
exclude from income tax up to $250,000 of profit if you're single or up to
$500,000 if you're married filing jointly. Generally, the exclusion may be used
only once every two years.
The law provides that married individuals may exclude up to
$500,000 of profits if:
* either spouse owned the home for at least two of the five
years before the sale,
* both spouses used the home as a principal residence for at
least two of the five years before the sale, and
* neither spouse is ineligible for the exclusion because of
the once-every-two-year limit. If one spouse cannot use the exclusion because
of the once-every-two-year rule, the other spouse may still claim the exclusion
if he or she qualifies. However, the exclusion then cannot exceed $250,000.
Meet the Requirements
The law does contain some relief for those taxpayers who
cannot meet the ownership and use rules or who have already excluded gain on a
home sale within the two-year limit. If the failure to meet either rule is due
to a job change, health problems, or certain other unforeseen circumstances, a
partial exclusion may be available. The partial exclusion is calculated based
on the fraction of the two years that the requirements were met.
The IRS reminds homeowners that if all the gain in their
home sale is excludable under the rules above, they probably don't need to
report the sale on their tax return. Only one home sale per two-year period can
be excluded, and only a taxpayer's main home qualifies for an exclusion. If a
taxpayer has two homes and lives in both of them, the main home is usually the
one lived in most of the time.
If you have questions about the tax consequences of your
home sale, contact our office.
Last Updated by Tax on 2013-09-25 12:16:28 PM