Discussion:Breach of contract
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Discussion Forum Index --> Tax Questions --> Breach of contract
| 23 October 2006 | |
| Hi. A taxpayer retains a builder (entered into a contract) to construct a new home. He gives the builder funds of approx $250,000 for this purpose. The builder uses approximately $20,000 for construction and then closes its doors ans ceases operation in 2005. Basically, he is in breach of contract. So, the taxpayer is out approximately $230,000. The case goes to court in 2006 and the taxpayer is only reimbursed approx $30,000. Therefore, he is out approx $200,000. My question is this....is the $200,000 allowed as a nonbusiness bad debt? Or would it qualify as a casualty/theft on form 4684?
Also, would the write off be allowed on 2006 income taxes or 2005? I would assume 2006 since the case was settled in court in 2006. Thanks! | |
| 23 October 2006 | |
| What were the findings of the court that resulted in a recovery of only $30k? | |
| 23 October 2006 | |
| The builder filed bankruptcy. All the taxpayer received was that small amount. So he is out a large amount of money. Just wondering if anyone has ever come across this before. I havent. | |
| 23 October 2006 | |
| The taxpayer is entitled to claim a nonbusiness bad debt for the difference between the judgment entered by the court and the amount ultimately recovered. | |
| 24 October 2006 | |
| Would you agree that the capital loss would be deductible in 2006 which is when they went to court and not 2005 which is when the builder stopped building on the home? | |
| 12 January 2008 | |
| What would the answer be if the construction was to be to improve a rental property? | |
PostingFromWork (talk|edits) said: | 12 January 2008 |
| I believe you can handle that as a business debt and write it off on Sch e. But you'd be hit by PAL etc. | |
| 12 January 2008 | |
| It would be deductible in the year that the debt becomes worthless and truly uncollectible according to an objective standard, and BK is one of those standards. So it's the year in which the BK became discharged. It's a little confusing though because you wrote that the case "goes to court." Are you referring to the BK court, or a civil court prior to the BK proceedings?
Also, the bad news is that your client will be able to take the $200,000 nonbusiness bad debt on his returns at only $3,000/year, unless he has capital gains against which to offset it. So I hope he plans to file tax returns for another 67 years. The biggest question, which I admit is irrelevant at this point, is why on earth would anyone with 2 brain cells to rub together front a builder $250,000 to construct a house? Sounds like he's sharp as a marble. | |
PostingFromWork (talk|edits) said: | 13 January 2008 |
| Happy, you talking about Smokey or El Cid? | |
| 13 January 2008 | |
| Here's what's come up at my office - client purchases rental property & then pays a contractor $10,000 for labor and $20,000 for materials to get the property ready to rent.
There's no written contract & contractor runs off with all of the money without doing any work. A police report was filed. Client subsequently did the work himself & will rent the property out in 2008. A business bad debt deduction looks like a possibility, but I'm wondering about the "valid and enforceable obligation to pay a fixed or determinable sum of money" part. Adding the $30K to basis is a slam dunk, but for Pete's sake, the client is out $30,000 in after tax dollars. Any thoughts? | |
| 13 January 2008 | |
| In rereading the rest of this thread, and reviewing other similar discussions, I'm concluding as per advice from The Great Riley2, that if I can get my client to obtain a court judgment against the contractor, which is not collectible, we can turn the situation into a valid bad debt.
This forum is truly amazing! | |
| 13 January 2008 | |
| Someone should mention earnest money so that this thread will become searchable for the unwashed masses. | |
Death&Taxes (talk|edits) said: | 13 January 2008 |
| Here is one link: Discussion: Deposit lost for real estate earnest money
Typing 'lost earnest money' into the search block will get you three more, and I bet Smokey came up with a few I missed. | |
