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The degree of coherence does not really matter, and these loans are undoubtedly commonplace. Over $ 60 billion US dollars a year is loaned to family members from the family. In spite of the common nature of family loans, one must be aware of some of the consequences of these loans both in sustained healthy family relationships and in potential tax implications.
It can be difficult to give a family loan if both parties do not fully define the terms of repayment and some people recommend that people always consider the money a gift. When family members do not repay loans, they can cause great pressure in relationships. If the lender considers money lost at the start, this may help reduce potential conflict later. It is also recommended that people do not lend money to anyone unless he or she can afford to lose it. Unlike a bank, there are no loans, insurance that will return money to the lender if a relative does not pay it back.
People seeking a loan from a family member must be reasonably certain that they can stick to a payment plan and an agreed payment amount. If a person thinks he will not be able to fulfill his obligations, he may want to ask for a gift instead of or not to borrow the money. In some ways, any borrower of a family loan should not consider this money coming from the family. Some people are more likely to refrain from repaying loans coming from family unless they sign a contract and think they will be sued if they do not pay.
Family loans tend to work better when the lender and borrower actually sign a contract containing terms and consequences if money remains unpaid. There are sample downloadable online contracts. Making the terms of the family loan extremely clear can help avoid misunderstandings along the way.
In the United States, a loan of less than $ 10,000 US dollars (USD) has no tax obligations and there are probably many people making small loans for family. A person can make this amount of a gift per year without paying gift fees and provided he does not charge the interest he does not make income if the loan is repaid. If he does charge interest on this small amount, this is technical taxable income and must be refunded on the tax return.
When a family loan exceeds $ 10,000, the situation may become dark. To avoid paying a gift tax, people need to claim money lent, but the IRS can assign a person an interest they expect him to collect as an income. To avoid this, consulting a good tax lawyer or accountant helps ensure the terms of the loan are clear, especially if no interest is being charged.
Another thing that can help claim this money as a loan is that the lender can claim the amount owed which will never be paid as a tax loss. Sometimes will try to charge the borrower’s taxes if the money technically becomes a gift due to non-payment, however. This can be a more reasonable step than having to sue a family member, but it is still a bit complicated and can be best handled by a tax professional.
It is recommended that family members think well before issuing or through borrowing family loans. Even past good relationships can sour if a loan is unpaid, and sometimes people who borrow money feel frustrated by examining their financial transactions with their family lenders. These loans can be a way to get interest in free funds, but there may be hidden costs. It is also wise for participants to understand potential tax obligations to create or accept a family loan or gift.