Discussion:Bad debt? or Personal?

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Discussion Forum Index --> Tax Questions --> Bad debt? or Personal?


El Cid (talk|edits) said:

16 October 2006
A taxpayer contracts with a builder to construct a new primary residence. He gives the builder $400,000, but the builder only uses about $100,000 in building the home. He takes off with the other $300,000. He did this to other homeowners in the same development. The homeowners sue and only get about 15 cents on the dollar back in court. Can he write off the $255,000 which was basically stolen from him as a bad debt?

Thanks.

1040man (talk|edits) said:

16 October 2006
Nonbusiness Bad Debts

If someone owes you money that you can not collect, you have a bad debt. You may be able to deduct the amount owed to you when you figure your tax for the year the debt becomes worthless. A debt must be genuine for you to deduct a loss. A debt is genuine if it arises from a debtor-creditor relationship based on a valid and enforceable obligation to repay a fixed or determinable sum of money. Bad debts that you did not get in the course of operating your trade or business are nonbusiness bad debts. To be deductible, nonbusiness bad debts must be totally worthless. You cannot deduct a partly worthless nonbusiness debt.

Genuine debt required. A debt must be genuine for you to deduct a loss. A debt is genuine if it arises from a debtor-creditor relationship based on a valid and enforceable obligation to repay a fixed or determinable sum of money.

Loan or gift. For a bad debt, you must show that there was an intention at the time of the transaction to make a loan and not a gift. If you lend money to a relative or friend with the understanding that it may not be re-paid, it is considered a gift and not a loan. You cannot take a bad debt deduction for a gift. There cannot be a bad debt unless there is a true creditor-debtor relationship between you and the person or organization that owes you the money.

How to report bad debts. Deduct non-business bad debts as short-term capital losses. For each bad debt, attach a statement to your return that contains: 1) A description of the debt, including the amount, and the date it became due, 2) The name of the debtor, and any business or family relationship between you and the debtor, 3) The efforts you made to collect the debt, and 4) Why you decided the debt was worthless. For example, you could show that the borrower has declared bankruptcy, or that legal action to collect would probably not result in payment of any part of the debt.

Death&Taxes (talk|edits) said:

16 October 2006
Was the developer arrested and charged with theft?

Jdugancpa (talk|edits) said:

16 October 2006
It's not a bad debt, it is a theft loss. Casualty and theft losses are reportable on Form 4684 and deductible on Sch A, Line 19.

Death&Taxes (talk|edits) said:

16 October 2006
That's what I was trying to get at! El Cid uses the term 'takes off' which makes it sound like theft.

1040man (talk|edits) said:

16 October 2006
El Cid was aking if he can he write off the $255,000 which was basically stolen from him as a bad debt? I was just illustrating what constitutes a Nonbusiness Bad Debts.

El Cid (talk|edits) said:

16 October 2006
Thanks all. I am going to get more details about what actually happened. I believe the builder filed for bankruptcy and the taxpayer along with around 7 others only received 15 cents on the dollar.

Jdd57cpa (talk|edits) said:

30 July 2007
Similar facts as above: My client paid $60k for work, $30k worth of work was completed when the contractor vanished. Is the remaining $30k the theft amount to be included on 4684?

Pegoo (talk|edits) said:

30 July 2007
Jdd57cpa, yes...

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