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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 12477
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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I have an interst bearing loan (second registered mortgage)

This answer was rated:

I have an interst bearing loan (second registered mortgage) that defaulted. Can I declare the loss on my tax return i.e. Fed, AZ?

NPVAdvisor :

Hi,

NPVAdvisor :

Yes, if the mortgage was made through your business, this will be a business bad debt

NPVAdvisor :

Here's the IRS' definition:

Customer:

Do you understand my problem?

NPVAdvisor :

Generally, a business bad debt is one that comes from operating your trade or business.


The following are examples of business bad debts (if previously included in income):



  • Loans to clients and suppliers

  • Credit sales to customers, or

  • Business loan guarantees


 


A business deducts its bad debts from gross income when figuring its taxable income. Business bad debts may be deducted in part or in full. You can claim a business bad debt using either the specific charge-off method or the nonaccrual-experience method.


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

NPVAdvisor :

Your are the mortgagor right?

NPVAdvisor :

You loaned and your borrower has defaulted?

Customer:

No, a private lender

NPVAdvisor :

But you ARE the lender?

Customer:

Not a regular registered business

NPVAdvisor :

ok

NPVAdvisor :

then this is a private bad debt, and the only real difference is that the loand has to be completely in default (sound's like you're there)

NPVAdvisor :

... no expectation of ever being repaid

NPVAdvisor :

Here's the IRS definition of when the debt is bad:

Customer:

correct

NPVAdvisor :

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

NPVAdvisor :

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.

NPVAdvisor :

Further ...

NPVAdvisor :

A nonbusiness bad debt is reported as a short-term capital loss on Form 8949

NPVAdvisor :

On this form. on 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). Use a separate line for each bad debt. It is subject to the capital loss limitations. A nonbusiness bad debt deduction requires a separate detailed statement attached to your return.

Customer:

So, as a pesonal tax filing I file an F 8949, that's it?

NPVAdvisor :

They don't proscribe a format for this "statement." Just concisely spell out the terms of the loan and why it has become non-collectable

Customer:

PS: the bad loan is in Canada, does that make a difference?

NPVAdvisor :

Yes, the 8949 flows to schedule D, which flows to the front of your 1040 as a capital loss

NPVAdvisor :

Nope, as long as you were recognizing the income on the loan here

NPVAdvisor :

and as long as you actually loaned out cash

NPVAdvisor :

From IRS: 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 repaid, it is considered a gift and not a loan.

Customer:

There is an interest tax treaty avoiding a return to be filed, with Canada, but I don't think capital loss would be included & would probably cause me to file a Canadian return, but that's a question for my accountant there.

NPVAdvisor :

Yes, as long as you don't deduct the loss in both places ... one other definition from IRS: "To deduct a bad debt, you must have previously included the amount in your income OR loaned out your cash."

NPVAdvisor :

For more information on non-business bad debts, refer to Publication 550,

Customer:

Yes, I have declared the income for years

NPVAdvisor :

Very clean then. You have legitimate loss, and easliy trackable, as the interest income will cease. Everything ties

NPVAdvisor :

AND because it flows to the front of the 1040, that AGI will flow to your state return

Customer:

Thx, how can I save this for my account ?, just hit the' save & exit'?

NPVAdvisor :

Arizona is one of the states where their return starts with AGI

Customer:

or do I rate you first?

NPVAdvisor :

Yes, I would also bookmark the page

NPVAdvisor :

Please, that's the only way they pay us here

NPVAdvisor :

By the way the links will stay active for future reference

Customer:

I rate you 'Excellent' & then hit save?

NPVAdvisor :

that'll work

Customer:

thx we're done

NPVAdvisor :

again if you want to just bookmark (save this as a favorite) this web page will stay out there indefinitely

NPVAdvisor :

You're welcome

NPVAdvisor :

Thanks

NPVAdvisor :

Lane

Customer:

I just did that!, thx goodbye

NPVAdvisor :

If you'd like to work with ME again just say "For Lane only," at the beginning of your next question

NPVAdvisor :

Good by! .. Have a god one!

Lane and other Tax Specialists are ready to help you


So, sorry.

I didn't have you closed out.

You can rate now.

Thanks again,
Lane


Thanks so much for the bonus!



If you'd like to work with ME again, just say "For Lane only," at the beginning of your question.

Thanks again,
Lane