Can I deduct the loss as a non business bad debt on my return
I borrowed money to a relative and we completed a promissory note with an interest rate. He paid back a minor amount of interest, but no principal. The loan was made several years ago and now I consider the loan uncollectable. No interest payments have been made for about 3 years. He lost his business, did not file bankruptcy. Can I deduct this loan on my tax return as a non business bad debt? I have some long term capital gain to offset this loss against, and then the rest at 3,000/yr.
Thank you.
Best Answers
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Information from the IRS:
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Hi Clair,
The link JM provided has all the information you need. For ease, let me just say this. If you feel the loan is non collectible (totally worthless) report it as a short-term capital loss on the Stocks or Investments Sold page. You will be limited to a $3,000 loss each year unless you have other capital gains.
Answers
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Hello, ClairPrody!
That is a great question!
In the year a nonbusiness debt is deemed worthless, you can claim this as a short-term capital loss.
You'd enter this within FreeTaxUSA by selecting 'Income' > 'Stocks or Investments Sold (1099-B)'.
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Nonbusiness Bad Debts - All other bad debts are nonbusiness bad debts. Nonbusiness bad debts must be totally worthless to be deductible. You can't deduct a partially worthless nonbusiness bad debt.
Report a totally worthless nonbusiness bad debt as a short-term capital loss on Form 8949, Sales and Other Dispositions of Capital Assets, Part 1, line 1. Enter the name of the debtor and "bad debt statement attached" in column (a). Enter your basis in the bad debt in column (e) and enter zero in column (d). Use a separate line for each bad debt. It's subject to the capital loss limitations. A deduction for a nonbusiness bad debt requires a separate detailed statement attached to your return. The statement must contain: a description of the debt, including the amount and the date it became due; the name of the debtor, and any business or family relationship between you and the debtor; the efforts you made to collect the debt; and why you decided the debt was worthless. For more information on nonbusiness bad debts, refer to Publication 550.
