If you’re going to loan money to your friends, CNN Money and Budgets Are Sexy have excellent articles on how to go about it, including getting the agreement in writing.
I would add that: 1) expect not to get paid back; and 2) to get some sort of security to protect yourself in the event the borrower can’t pay you back.
CNN Money: My Sister Wants to Borrow Money
Document the loan. Basically, you want to establish that this is a bona fide loan. This makes it clear to the borrower that he or she is taking on a real financial obligation and that you expect it to be repaid. It also makes it clear to the IRS that you’re really lending the money, not giving it away. By doing this, you may be able to claim a non-business bad-debt tax deduction if your relative doesn’t pay up.
Need some help?
So if you’re thinking of lending a significant sum of money to a relative, you may want to consult an attorney or tax accountant first, just to be sure you know what you’re getting into. Indeed, doing this ahead of time may very well reduce your chances of having to consult one under worse circumstances later on.
Budgets Are Sexy: Be Careful Mixing Money with Family!
If you decide to go for it, write down in complete detail the arrangements you’ll be making so everyone’s on the exact same page. We all think it could never happen to us, but money has a strange way of breaking families apart. So please, be careful out there
Related posts:
- Want to Loan Friends or Family Money? Protect Yourself or Kiss the Money Goodbye
- More on (Not) Loaning Money to Friends
- You Need Money? I Have Some Money For Ya’. Oh, and Some Tax Breaks.
- A Corporation or Limited Liability Company Can Help You Get Business and Make More Money
- California Limited Liability Annual Tax for 2009
