Seems as you had an installment sale - if you sell a property at a gain where at least one payment is to be received after the tax year in which the sale occurs.
Generally - you are required to report the sale under the installment method unless you "elect out" on or before the due date for filing your tax return (including extensions) for the year of the sale.
If you elect out, you report all the gain as income in the year of the sale.
That is my understanding of your situation.
If an installment obligation is canceled or otherwise becomes unenforceable, it is treated as a disposition other than a sale or exchange. Your gain or loss is the difference between your basis in the obligation and its FMV at the time you cancel it. If the parties are related, the FMV of the obligation is considered to be no less than its full face value.
If you accept part payment on the balance of the buyer's installment debt to you and forgive the rest of the debt, you treat the settlement as a disposition of the installment obligation. Your gain or loss is the difference between your basis in the obligation and the amount you realize on the settlement.
Because the property was not repossessed - you have a loss. Because you included the full gain in income in the year of sale, so the loss is a bad debt.
A business bad debt is a loss from the worthlessness of a debt that was either:
-- Created or acquired in your trade or business, or
-- Closely related to your trade or business when it became partly or totally worthless.
A debt is closely related to your trade or business if your primary motive for incurring the debt is business related.
There are two methods to claim a business bad debt.
-- The specific charge-off method.
-- The non accrual-experience method.
Generally, you must use the specific charge-off method. However, you may use the non accrual-experience method if you meet certain requirements.
How to deduct business bad debts - see chapter 10 of Publication 535, Business Expenses - www.irs.gov/pub/irs-pdf/p535.pdf .
Let me know if you need any help.