Today TaxMama hears from Mark in Bellevue, WA who tells us. “Over the past year, I lent my sister roughly $10,000.00 to assist her in moving to a new city, getting a new job and turning her life around. I also purchased a car for her (in my name). The agreement was that she would make the loan payments for the car, until such time that her credit was repaired and she could finance one on her own.
All loans were documented in a spreadsheet that we both maintained. Once she got a good job and was back on her feet, we agreed on a repayment schedule via e-mail.
I’d like to go ahead and formalize this arrangement via a formal loan document, so I can write it off on my taxes if she proves unable to pay. Can I do this even though the funds were disbursed in the past? I can document all funds transferred, so proving that the money changed hands is easy – I’m just curious if I can formalize the loan after the fact.”
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Dear Mark,
How very well done!
Even without the formal notes, you’re in good shape. Did you define the interest rates your sister will be paying you? If you have that at the top of the spreadsheet, that’s adequate.
Now, as to formalizing the notes and defining the repayment terms in writing, there’s no reason you can’t do that now.
And since it was already all agreed to earlier, just write the note, effective the date all this started.
You can have the signature lines dated now. Just be sure that the note spells out when the loans started, that they are supported by a spreadsheet (attached and initialed) with X balance as of this date.
You can also spell out in the note, that the loan balance may increase if additional funds are advanced, and interest will be charged appropriately.
You can find note forms online for free. Just search for promissory notes. And you can learn more about promissory notes at Nolo.com.
Incidentally, if she ever defaults, and you want to write off the loan, first you’ll have to prove the loan is not collectible. So, you’ll have to either sue your own sister, or prove she’s insolvent.
And remember, you’ll find answers to lots of questions about loans and other tax information, free. Where? At TaxMama.com
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Nolo.com :: Promissory Notes
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