Loan wasn’t paid back

bobcats
bobcats Member Posts: 1 Newcomer
in Filing my taxes

I loaned a person $40,000 in which I was supposed to be repaid at 8% over 2 years. I received $10,000 after one year, but since then I have not received any money. The person I loaned to is delinquent and unresponsive. I’m not interested in collecting the delinquent money as I’m sure the person doesn’t have the money nor do I know how o contact the person. Can I can a tax deduction on the $30,000 I never received? That’s all I really want at this point?

Comments

  • Henry
    Henry FreeTaxUSA Agent Posts: 165 image
    HI bobcats, you may be able to deduct the $30,000 as a non-business bad debt, which is treated as a short-term capital loss on your tax return. The IRS does allow this type of deduction, but there are some important criteria you'll need to meet first. Here's what the IRS says about it (https://www.irs.gov/taxtopics/tc453):

    1. The loan must have been a genuine loan, not a gift -- meaning there was a real expectation of repayment. The fact that you charged 8% interest and had a repayment schedule works in your favor here.
    2. The debt must be 100% worthless. The IRS requires that there's no reasonable expectation the borrower can or will repay you. Being unresponsive and unreachable can support this, but you'll want to document the efforts you made to collect (calls, texts, letters, emails, etc.).
    3. You can only claim the deduction in the year the debt becomes worthless. You don't have to wait until the loan's due date has passed if you can show it's already uncollectible.

    One important note: as a cash-method taxpayer (which most individuals are), you generally can't deduct unpaid interest as a bad debt -- only the principal you actually loaned out and didn't get back. So the deductible amount would be the $30,000 in principal still owed, not any interest that went unpaid.

    To enter this in FreeTaxUSA, go to the Investment Income section and enter it as "Other Sales". Here's how to fill it in:

    1. Description of Property: Enter the name of the debtor
    2. Date Acquired: Select "Various Dates Acquired - One Year Or Less" so it's treated as a short-term capital loss
    3. Date Sold: Enter the date the debt became worthless
    4. Sales Proceeds: Enter $0
    5. Cost or Basis: Enter $30,000

    You should also prepare a written statement describing the loan amount, the repayment terms, your relationship to the borrower, the efforts you made to collect, and why you believe the debt is now worthless. If you e-file, keep this statement in your records in case the IRS asks for it. If you mail your return, attach it.

    We have a great article on our Community website that goes into more detail if you'd like to check it out:
    https://community.freetaxusa.com/kb/articles/127-can-i-write-off-a-loan-that-didn-t-get-paid-back

Categories