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Lev
Lev, Tax Advisor
Category: Tax
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we sold our home on a contract for deed. The buyer defaulted

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we sold our home on a contract for deed. The buyer defaulted and we had a total of $10,000 of debt that we had to pay to get the house ba in shape, utilities, taxes etc. We went to small claims court and got a judgement in our favor. We cn not get them to pay for a year. Can i deduct this bad debt on my income taxes

Lev :

Hi and welcome to our site!
Sorry for your situation. If someone owes you money that you cannot collect, you may have a bad debt.
To deduct a bad debt, you must have previously included the amount in your income or loaned out your cash. There are two kinds of bad debts – business and nonbusiness.


Nonbusiness bad debts must be totally worthless to be deductible. You cannot deduct a partially worthless nonbusiness bad debt.


A debt becomes worthless when the surrounding facts and circumstances indicate there is no reasonable expectation of payment. To show that a debt is worthless, you must establish that you have taken reasonable steps to collect the debt. It is not necessary to go to court if you can show that a judgment from the court would be uncollectible. You may take the deduction only in the year the debt becomes worthless. You do not have to wait until a debt is due to determine whether it is worthless.

Lev :

A nonbusiness bad debt is reported as a short-term capital loss on Form 8949 , Sales and Other Dispositions of Capital Assets, Part 1, line 1. Enter the name of the debtor and “bad debt statement attached” in column (a). Enter your basis in the bad debt in column (e) and enter zero in column (d).
A nonbusiness bad debt deduction requires a separate detailed statement attached to your return.

Just in case you were not able to use the chat - I am switching to Q&A mode and posting the answer below.
Please feel free to communicate if you need any clarification or have other tax related issues.

Sorry for your situation. If someone owes you money that you cannot collect, you may have a bad debt.
To deduct a bad debt, you must have previously included the amount in your income or loaned out your cash. There are two kinds of bad debts – business and nonbusiness.
Nonbusiness bad debts must be totally worthless to be deductible. You cannot deduct a partially worthless nonbusiness bad debt.
A debt becomes worthless when the surrounding facts and circumstances indicate there is no reasonable expectation of payment. To show that a debt is worthless, you must establish that you have taken reasonable steps to collect the debt. It is not necessary to go to court if you can show that a judgment from the court would be uncollectible. You may take the deduction only in the year the debt becomes worthless. You do not have to wait until a debt is due to determine whether it is worthless.
A nonbusiness bad debt is reported as a short-term capital loss on Form 8949 , Sales and Other Dispositions of Capital Assets, Part 1, line 1. Enter the name of the debtor and “bad debt statement attached” in column (a). Enter your basis in the bad debt in column (e) and enter zero in column (d).
A nonbusiness bad debt deduction requires a separate detailed statement attached to your return.
Lev and 3 other Tax Specialists are ready to help you
Customer: replied 3 years ago.

I did what you said and filled out the form. Also attatching wxplanation pafe and copy of small claims court ruling. The people who bought the house are not able to work due to health major problems. Have that documented too.


My question isnow....it says on line 21 of schedule D we can only deduct $3000 for our tax year 2012. Is this correct and if so what happens to other $7000 loss/ Thanks

Because that deduction is reported as a capital loss - the loss may be fully used to offset other capital gains.
However if you do not have other capital gains or your net capital loss is more than $3000 - only $3000 may be used to offset other taxable income.
The rest will be carried over to following years until fully used.

Please also be aware that to deduct a bad debt, you must have previously included the amount in your income or loaned out your cash.
In your explanation note - you need specifically mention that amount owned to you was previously included the amount in your income or you loaned out your cash.

Let me know if you need any help.
Lev and 3 other Tax Specialists are ready to help you
Customer: replied 3 years ago.

he money owed to us included unpaid real estate taxes they did not pay, utility bills, clean up of property they left in shambles, We have receipts for all this and was verified in court documents plus travel costs to take them to court and court fees we paid. Will this suffice>


Thanks for the advice on carry overs. Tees me off people that are rich can write of big amounts and we can only do $3000. No need to answer that. We are not rich and do not or ever have had capitol gains.

Generally - I do not see any issues.
Still - you need to be very careful with such deduction - and clear itemize the total amount of worthless nonbusiness bad debt.
For instance - if you actually paid real estate taxes - and that payment was for the buyer - and did not deduct these payments on your tax return - then you may consider that payments were for the buyer - as if you were loaned out your cash - and that amount may be deducted a bad debt.
Similar for the travel costs and other legal expenses - that amount was your out of pocket expenses - and because the court rules that the buyer is responsible for these expenses - that amount as well may be deducted a bad debt.
However, be sure that none of these expenses were previously deducted on your tax returns. If for instance you deducted real estate taxes - that amount must be excluded from bad debt deduction.
Lev and 3 other Tax Specialists are ready to help you