I (as an individual) lent money to a relative against real property with a written mortgage and note years ago. The borrower hadn't been paying me over the years until they sold the property last year under unfavorable conditions, and I received the entire proceeds of sale, which was less than the principal. (I never received the agreed interest for this same reason.)
The Mortgage and Note contained a No-Deficiency provision, contractually restricting me against coming after the borrower for the shortfall.
Since this loan was unrelated to my line of work or business, would the remaining unpaid principal be "non-business bad debt" that can be written off as short term loss through Form 8949, Schedule D, plus Explanation of Bad Debt? The remaining principal shortfall has become totally uncollectible. Or would the fact I agreed to a no-deficiency provision mean I have some other kind of loss, or perhaps some sort of nondeductible, non-reportable loss?
If I report this as non-business bad debt, would I need to file 1099-C cancelation of debt against the borrower? Would the borrower have to declare the unpaid principal amount as income accruing from forgiven debt? Or would the No-Deficiency provision in the contract mean that they are not considered to have forgiven debt since they are contractually excused from paying the remainder?
Thanks
