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How to Create a Binding Personal Loan Agreement

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  • 08-08-2017, 06:43 PM
    debins
    How to Create a Binding Personal Loan Agreement
    My question involves collection proceedings in the State of: Florida

    One of my family members wants to borrow some money from me. He (borrower) cannot pay any part of the loan for the next one year therefore there will be no payments in the first one tear. After that he has to pay back the loan, in whatever amounts I asked and whenever I asked, until the loan is completely paid. There is no interest on the loan. In any case, the loan has to be completely paid back within 4 years and 11 months.

    If a loan agreement is executed by specifying the above conditions then will it be legally valid OR if any of the above conditions are violating any existing law of Florida? Of course, the agreement will contain other mandatory details such as the loan amount, names of the persons, witnesses, etc.

    By the way, whether a loan agreement in electronic format (once signed on a physical copy then scanned and covered to PDF) will have the same effect as that of a physical copy if both the parties did not question the authenticity of the PDF document? (Florida Statue 668.50(7))?
  • 08-08-2017, 06:58 PM
    adjusterjack
    Re: Validity of a Personal Loan Agreement
    If you write it up, you both agree to its terms, you both sign it, it's legal and binding.

    There's just a few little details you are missing.

    1 - He wants to borrow money from you.
    2 - Because he has bad credit.
    3 - No bank will lend him money - with good reason.
    4 - You are not smarter than a bank that won't lend him money.
    5 - In a year when you start trying to collect and he blows you off you'll be back here sobbing "What are my rights" just like the thousands of others who loaned money to friends and relatives and can't get it back.

    DON'T DO IT.

    PS: Just look at all the online resources about why you shouldn't lend money to friends and relatives:

    https://duckduckgo.com/?q=why+you+sh...es&t=hq&ia=web

    And don't co-sign for anybody either. That's also the kiss of death.
  • 08-09-2017, 03:50 AM
    debins
    Re: Validity of a Personal Loan Agreement
    Thanks for the feedback.

    whether a loan agreement in electronic format (once signed on a physical copy then scanned and covered to PDF) will have the same effect as that of a physical copy if both the parties did not question the authenticity of the PDF document? (Florida Statue 668.50(7))?
  • 08-09-2017, 04:40 AM
    Taxing Matters
    Re: How to Create a Binding Personal Loan Agreement
    Quote:

    Quoting debins
    View Post
    My question involves collection proceedings in the State of: Florida

    One of my family members wants to borrow some money from me. He (borrower) cannot pay any part of the loan for the next one year therefore there will be no payments in the first one tear. After that he has to pay back the loan, in whatever amounts I asked and whenever I asked, until the loan is completely paid. There is no interest on the loan. In any case, the loan has to be completely paid back within 4 years and 11 months.

    The loan has two defects I see that might cause you problems. First, it is better if the repayment terms are more definite. Saying he must repay “in whatever amounts I ask and whenever asked” is vague and leaves that open to attack if you sue before the 5 years is up. Second, a zero interest rate loan poses a potential tax problem for you. The tax law imputes interest on the loan, and then treats the transaction as if you gave the borrow that interest amount as a gift, and then the borrower then turned around and paid that interest to you. That means you could incur both gift tax consequences and have interest income from the loan. This is known as a gift loan situation. This rule does not apply if the total amount of all below market loans between borrower and lender are $10,000 or less. If the loans are $100,000 or less, there is a limit on the imputed interest equal to your net investment interest during the year. This gift loan treatment is why, if the loans exceed $10,000, it is recommended you charge at least the minimum rate of interest that the IRS publicizes periodically and thus avoid the gift loan problem.
  • 08-09-2017, 06:23 AM
    debins
    Re: How to Create a Binding Personal Loan Agreement
    Thanks for the feedback. The borrower is a very close relative who helped me a lot in my life and I do not wish to charge any interest but to avoid the gift loan problem you mentioned, I wish to charge him very nominal interest rate, say 0.001%, rather than the minimum rate of interest that the IRS publicizes. If I charge him this low interest rate (0.001%) can I avoid gift loan problem OR is there any legal problem that I or my relative face by this 0.001% interest rate?
  • 08-09-2017, 06:55 AM
    Taxing Matters
    Re: How to Create a Binding Personal Loan Agreement
    Quote:

    Quoting debins
    View Post
    Thanks for the feedback. The borrower is a very close relative who helped me a lot in my life and I do not wish to charge any interest but to avoid the gift loan problem you mentioned, I wish to charge him very nominal interest rate, say 0.001%, rather than the minimum rate of interest that the IRS publicizes. If I charge him this low interest rate (0.001%) can I avoid gift loan problem OR is there any legal problem that I or my relative face by this 0.001% interest rate?

    Charging him that rate of interest does not avoid the gift loan problem. It just reduces the inclusion very slightly. Any loan that is below market (i.e. below the rate specified by the IRS) will run into that problem, assuming that the total of below market loans between you and this close relative exceeds $10,000. At the moment the interest rate needed to avoid this problem is 1.09%, which is the rate set in July by the IRS in Rev. Rul. 2017-14, published in Internal Revenue Bulletin (IRB) 2017-27. It’s the rate for IRC 7872 (at the bottom). The IRS has not yet announced rates for August, but it won’t change much, if at all. So you can see, the interest rate needed to avoid the problem completely is not very large.
  • 08-09-2017, 08:10 AM
    debins
    Re: How to Create a Binding Personal Loan Agreement
    Thanks again for the feedback, very helpful! I will charge him the interest rate publicized by IRS.

    In addition to my close relative, due to some special circumstances, I am planning to give more than $10,000 as loan to my wife also. Does the gift loan problem applicable/valid (to the loan to my wife) if I do not charge any interest on the loan? Is it true that I do not need to pay any gift tax on the interest (on the amount I gave as loan to my wife) because there is unlimited amount of gifts possible without taxes between wife and husband. Also, please let me know if I need to pay tax on that interest amount because IRS considers that my wife has paid me back the interest.
    Please note that I am jointly filing taxes with my wife.
  • 08-09-2017, 08:33 AM
    adjusterjack
    Re: How to Create a Binding Personal Loan Agreement
    Quote:

    Quoting debins
    View Post
    Thanks again for the feedback, very helpful! I will charge him the interest rate publicized by IRS.

    In addition to my close relative, due to some special circumstances, I am planning to give more than $10,000 as loan to my wife also. Does the gift loan problem applicable/valid (to the loan to my wife) if I do not charge any interest on the loan? Is it true that I do not need to pay any gift tax on the interest (on the amount I gave as loan to my wife) because there is unlimited amount of gifts possible without taxes between wife and husband. Also, please let me know if I need to pay tax on that interest amount because IRS considers that my wife has paid me back the interest.
    Please note that I am jointly filing taxes with my wife.

    You can give your wife up to $14,000 this year without any tax issues and no need to file a gift tax return for it.

    However, whether the money you give to your wife even rises to the status of "loan" depends on the circumstances. Might want to explain that before TM gets back.
  • 08-09-2017, 08:44 AM
    llworking
    Re: How to Create a Binding Personal Loan Agreement
    Quote:

    Quoting adjusterjack
    View Post
    You can give your wife up to $14,000 this year without any tax issues and no need to file a gift tax return for it.

    However, whether the money you give to your wife even rises to the status of "loan" depends on the circumstances. Might want to explain that before TM gets back.

    As the OP mentioned Jack, gifts between spouses are unlimited...the 14k applies to gifts to people other than a spouse. Also, interest between spouses, when filing a joint tax return, is ignored.
  • 08-09-2017, 09:05 AM
    debins
    Re: How to Create a Binding Personal Loan Agreement
    Thank you very much for the feedback. I need to give the money as loan but not as gift to my wife.


    To make sure I understood correctly: If I give more than $14,000 loan to my wife, the “gift loan problem” is not applicable/valid here. That is, neither of us (I and/or my wife) need to pay any taxes, on this loan or on its interest. Therefore, I can give $100,000 as loan to my wife and get exactly $100,000 back from her after 2 years and neither of us need to pay any tax on this loan/its interest; and neither of us face any “gift loan problem” due to this. In other words, I can give whatever amount I wish as a loan to my wife with 0% interest.
    Please let me know if my above interpretation/understanding is correct.

    This forum is very helpful.
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