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Ask Merlo Your Own Question
Merlo, Accountant
Category: Tax
Satisfied Customers: 9783
Experience:  25+ years tax consulting. Specializing in returns for US citizens living abroad
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Help please could be hard on family how to write off loss of

Customer Question

Help please could be hard on family how to write off loss of investment in a business I had a stone quarry buisness I took out a loan for exploring to find stone 150000 my mother inlaw put up her annuity as collateral on the loan I have paid on it for 5 years but have lost the buisness due to the market for stone sales and can no longer pay on the loan so my mother inlaw is upset with me is there any way for her to write off her loss of the $100000 she will take because of my failure of the buisness ?

It is not a SBA loan just a buisness loan they knew my mother inlaw had the money to cover the loan so that is the way they loaned me the money.I live in NY
Submitted: 7 years ago.
Category: Tax
Expert:  Anne replied 7 years ago.
HiCustomerbr />
Thank you for using justanswer. If your mother in law actually loaned you the $150,000, then she may take a "bad debt" deduction on Form 1040, Schedule D however, she will be limited to $3000 loss/year after taking into account any gains she may have made during the year on any investments such as stocks, bonds, mutual funds, etc.

This loss will carry over every year until it is finally "used up". Please see below:

Tax Topics - Topic 453 Bad Debt Deduction

If your mother in law has now become legally obligated to pay off the loan because she put up collateral, then unfortunately, this is considered a personal debt, just like a car loan or credit card payment, and is not deductible on her taxes.

I hope this helps.
Customer: replied 7 years ago.
this is not a personal loan it was a buisness loan i took out, they used her money as collateral,this is why i was unable to get a loan modification to lower the intrest and payment so i could keep paying on the loan
Customer: replied 7 years ago.
Relist: I prefer a second opinion.
Expert:  Merlo replied 7 years ago.

I see you have asked for a second opinion on the answer to your question.

I have to say that I agree 100% with Anne on her answer. Even though this was a loan that your mother-in-law made co-signed for your business, that does not make it a business bad debt. For her it was a personal loan that she co-signed for you to use for business purposes.

A business bad debt is one that comes from operating your trade or business. In other words, it would be a debt that someone owes your business which you cannot collect.

Your mother-in-law did not actually invest in your business. She simply co-signed a loan for your use. Her deduction for this can be no more than what is allowed for the write off of a personal bad debt, which as Anne stated will be a maximum of $3,000 in net losses in any one year.

Customer: replied 7 years ago.
she was not a co signer she just put up her annuity to back the loan
Expert:  Merlo replied 7 years ago.
Hello againCustomer

The same principle applies whether she co-signed the loan, or took out the loan herself or put up her annuity to back the loan. It would still be considered a personal loan.

I realize this is not the answer you were hoping for, but unfortunately that is how this will be treated in the eyes of the IRS.

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