'I feel like a fool': I loaned my friend and former lover $50,000 to help her buy a home - now she's treating it as a gift

By Quentin Fottrell

'I gradually put $50,000 into her bank account so she would have that cash cushion ahead of her interview with the co-op board'

Dear Quentin,

I had a fling with a very nice woman about two years ago, and we became friends. She was not interested in a relationship with me, which was disappointing at the time and, even though I loved her and wanted her to love me back, I respected her decision. A few years ago, she took advantage of the low interest rates and bought an apartment with a 3.5% 30-year rate. I gradually put $50,000 into her bank account so she would have that cash cushion ahead of her interview with the co-op board. They accepted her, and she moved in.

The problem: She has continued as if the money was a gift. I have brought up the fact that I would like her to repay the money - as agreed at the time - and she said she's doing her best. But the more time that goes by, the more I have come to realize that she has no intention of ever paying me back. In a worst-case scenario, the loan will need to be written off as bad debt; assuming that happens, how do I account for that on my taxes? I feel like she had no intention of paying me back, although knowing her that's hard to believe.

In the meantime, how can I persuade her to repay me the $50,000?

Fool for Love & Money

Related: I lost $240,000 after a 'friend' I met on Instagram encouraged me to invest in crypto. Can I write off my loss?

Dear Love & Money,

People will do what comes easiest.

At this moment in time, having a bank balance that is $50,000 richer makes life easier for her. In some ways, it's not personal, which makes the whole affair even more difficult to process. The first rule of loaning money to friends: Don't do it. The second: If you do, don't loan what you can't afford to lose. The third: The relationship will rarely, if ever, be the same. And the golden rule for you: You made a decision to lend this woman money because you wanted something from her - her approval, respect, love, attention. You were and/or are in love with her, and she exploited that to get what she wanted.

The co-op board and lender are trying to ascertain that the person is financially stable. For that reason, you were helping her - in theory - commit fraud with this "phony money," especially if she was presenting her bank account to the lender. If the building's co-op board saw a sudden $50,000 deposit they would have wanted you to sign a document testifying that it was indeed a gift, rather than a loan. And many banks won't allow such a gift, unless it comes from a family member. In some rare cases, for instance, a fiancé could qualify as a family member.

Before you loan money to a friend, know this: Whether you lend $5 or $50,000, assume that you will never see it again. About two-thirds of people who have borrowed money say it was never returned, according to a survey of nearly 3,000 adults released by CouponCodesPro. They owed an average of $522 each, which puts your generosity and, perhaps, naivety into perspective. Ex-partners were among those tapped for money most often. What's most alarming about that particular study: 60% of those said they borrow money a couple of times a year and 27% said they hit friends and family up for money most months. Again, it's a proximity problem.

Related: I fell victim to the 'easiest banking scam in the world,' and $20,000 was stolen from my account. How could I have been such a fool?

Proving to the IRS it's not a gift

People who have bad debts are generally only able to write off part of the loan that was documented in a loan agreement or, in an ideal scenario, one drafted by an attorney. A legal loan agreement should have all of the terms and interest rates, how the loan will be repaid (in installments or a lump sum) and by what date. A solid loan agreement should also be witnessed and notarized, which would help if there was a legal dispute. Now for the bad news (even if you did have an official loan agreement): The Internal Revenue Service puts a limit on such capital losses at $3,000 a year.

"The debt must have been a bona fide loan-you gave the money with every expectation of being repaid," says TurboTax. "If you charged interest, and the borrower signed a promissory note, this provides a good indication that you expected to get your money back. Otherwise, the IRS might consider the exchange to be a gift, particularly if the borrower is a friend or a family member. And gifts aren't tax deductible. The unpaid debt must be 100% worthless before you can deduct it. There must be no chance that the borrower can or will ever pay you back the amount of the loan. It is important to make a documented effort to collect your money with letters, invoices [and] phone calls."

It's more complicated when it comes to dealing with an undocumented loan. You would need to get a written statement from the third party to acknowledge the bad debt, so you could at least show proof; a check or receipt would also help. This is more complicated and may require advice from a financial planner or attorney. The IRS typically considers gifts to immediate family members as gifts rather than loans and you must show that the loan to your friend wasn't a gift - that is, there was no expectation that it would go unpaid - and stipulate your relationship to the third party. But a write-off of $3,000 is a drop in the ocean compared to the $50,000 you loaned this woman.

She won't pay it back if there is no reason to do so. Like I told this man who had $100,000 he gave to a contractor for materials, furniture and appliances, the contractor broke down in tears not because he suddenly had a change of heart but because he believed he was going to be publicly exposed. If he had any qualms about stealing money from one of his clients - and was unable to go about his day-to-day life after spending his $100,000 - he would not have done it in the first place. The same is true for this woman. If she cared about you, she would have insisted on having a notarized loan agreement, if only to make sure you got your money back in case something happened to her before she repaid it. The best in you appealed to the worst in her.

It's a devastating realization.

The Moneyist regrets he cannot reply to questions individually.

Previous columns by Quentin Fottrell:

'I don't want anyone telling me what to do': My second husband wants to put our $750,000 home in a trust for his children. Does he have the right?

'I'm conflicted': I have two sons - one is a hard worker with kids and the other is a 'carefree' actor. Should I leave the 'family man' more money in my will?

'We don't want his daughter to lose out': My late son named his brother, who is a minor, as beneficiary on his life-insurance policy. How do we rectify this?

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-Quentin Fottrell

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