Can I "write off" two private money loans in the amount of $200,000 that I made to a client over 20 years ago an he has not repaid them?

[svail]

The two loans are secured by mortgage trust deeds on two different properties. I do not want to foreclose on these properties. I just want to write off what is owed me on my tax returns. How do I do that?

[Vanessa A]

No.  As long as you have a lien on the property they are not completely worthless.  You can foreclose and collect your money.  In order to claim a bad debt, the loan has to be completely worthless and then you would claim it in the year it became completely worthless.  So, in your situation, you would need to foreclose on the properties then if you sold them for less than you are owed, the excess would be written off. 

[svail]

What happens if I don't want to foreclose. He hasn't paid me in over 20 years. He has suggested paying me $20,000 if I release both liens on his property. Can I write off the remaining amount he owes me?

[AmyC]

Maybe but doubtful. Since this is a business bad debt from over 20 years ago, be sure you qualify and have all the paperwork to back it up where you have been actively pursuing collection along with the original debt and income claimed on tax return. See Topic No. 453, Bad Debt Deduction and Publication 535 for methods of deduction.

I don't believe the IRS will agree that you released valuable property for $20,000. They will be looking for a relative or some other reason why you have let this go which will invalidate your claim.

[Opus 17]

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@svail wrote:

What happens if I don't want to foreclose. He hasn't paid me in over 20 years. He has suggested paying me $20,000 if I release both liens on his property. Can I write off the remaining amount he owes me?

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"A debt becomes worthless when the surrounding facts and circumstances indicate there's no reasonable expectation that the debt will be repaid. To show that a debt is worthless, you must establish that you've taken reasonable steps to collect the debt. It's 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 don't have to wait until a debt is due to determine that it's worthless."

If you have recourse to foreclose, and you don't, then you have not taken all reasonable steps to collect the debt.  No one cares if you forgive the debt, but you don't get a tax break for being nice.

Additionally, your debtor would be required to report the forgiven debt as taxable income to them, whether you can deduct it or not.  However, this is on the honor system since you are not required to issue a 1099-C for canceled debt unless you are in the business of being a lender.