Agreed, you must make diligent efforts to collect on the loan before the IRS will accept the designation of a bad debt. I should have mentioned that in my previous answer. If the “build out” was to her personal home, and then it was converted to personal use, that becomes a gift from you to her. (If you had lent the money to a stranger who had converted it to their personal home, you would sue them.) Likewise, the equipment should be sold and used to repay as much of the loan as possible before you determine that the remainder is an uncollectible bad debt.
