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BK-CPA
BK-CPA, Certified Public Accountant (CPA)
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Experience:  Owner of a CPA firm
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In 2004, a friend asked if I wanted to give him money to invest

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In 2004, a friend asked if I wanted to give him money to invest in real estate speculation, pooled with the money from others. I now consider it a total loss. If I would like to write it off in 2010 (assuming I may), what kind of documentation should I keep? Would a letter from this friend, who is a professional banker, be sufficient?
Submitted: 3 years ago.
Category: Tax
Expert:  BK-CPA replied 3 years ago.

Hello and thank you for your question.

 

In general, these situations involve claiming a bad debt. Depending on your investment, you may have a worthless security or theft loss. Alternatively, you could elect to abandon the money all together. All of the above options carry different tax strategies and implications. A bad debt may involve forgiveness of debt income to your friend (review Form 1099-C).

 

For all alternatives, the timing of the deduction is important for when you are claiming the loss. The year you claim the loss depends on the date your investment becomes a bad debt, worthless, stolen, and/or abandoned.

 

A bad debt is treated as a short term capital loss, generally.

 

A worthless security is treated as sold on the last day of the tax year and may be long or short term capital loss.

 

A theft loss may be treated in different manners, and can be tricky, but the NOL loss provisions provide some interesting relief and potential for ordinary loss treatment when it comes to theft and casualty losses.

 

When you abandon an investment, you generally get to claim it on Schedule A as a miscellaneous itemized deduction subject to the AGI limitations, phaseout, alternative minimum tax, etc.

 

This is quite a bit of information to consider and points you in the right direction. Ultimately, your decision should be based on your personal facts and circumstances, so I cannot tell you what to do over JustAnswers. I am happy to clarify some things and search for a reference or two (meaning Code sections and regulations sections) as applicable and necessary for your question (within reason). I must ultimately suggest that you visit a local tax professional for this and present your personal considerations with respect to the above options.

 

Thank you for your question!!

Customer: replied 3 years ago.
Thank you. To me, it sounds like I am abandoning the investment, which would allow me to claim it on Schedule A. Basically, I never got anything from the friend--no statement, no certificate, no notes, and I don't have the heart to even ask him about it because I know that he lost a lot of money himself. I basically don't care about it anymore ($6000 total). Does this sound like it counts as abandoning the investment?
Expert:  BK-CPA replied 3 years ago.

This does sound like a situation that may warrant abandonment treatment. Here is some more information to help you make that determination (I, again, cannot over JustAnswers make that determination for you). Below is an IRS publication and IRC (Internal revenue code section) 165 selected paragraphs w/ link to the full section.

 

http://www.irs.gov/publications/p4681/ch03.html

 

The abandonment of property is a disposition of property. You abandon property when you voluntarily and permanently give up possession and use of the property with the intention of ending your ownership but without passing it on to anyone else.

 

Loss from the abandonment of business or investment property is deductible as an ordinary loss, even if the property is a capital asset. The loss is the property's adjusted basis when abandoned. However, if the property is later foreclosed on or repossessed, gain or loss is figured as discussed earlier. The abandonment loss is deducted in the tax year in which the loss is sustained.

 

You cannot deduct any loss from abandonment of your home or other property held for personal use.

 

 

Example.

In 2006, Anne purchased a home for $200,000. In 2009, Anne lost her job and was unable to continue making her mortgage loan payments. Because her mortgage loan balance was $185,000 and the FMV of her home was only $150,000, Anne decided to abandon her home by permanently moving out on August 1, 2009. Anne has a nondeductible loss of $200,000 (the adjusted basis). If the bank later forecloses on the loan or repossesses the house, she will have to figure her gain or nondeductible loss as discussed earlier in chapter 2 .

 

...

 

...

 

 

 

http://www.law.cornell.edu/uscode/26/usc_sec_26_00000165----000-.html

 

§ 165. Losses

How Current is This?

(a) General rule There shall be allowed as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise.

 

...

...

 

(c) Limitation on losses of individuals In the case of an individual, the deduction under subsection (a) shall be limited to-

 

(1) losses incurred in a trade or business;

(2) losses incurred in any transaction entered into for profit, though not connected with a trade or business; and

(3) except as provided in subsection (h), losses of property not connected with a trade or business or a transaction entered into for profit, if such losses arise from fire, storm, shipwreck, or other casualty, or from theft.

BK-CPA, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 810
Experience: Owner of a CPA firm
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