topic If I lent money out to a friend, and in the event I am not paid back, can I write this loss off on my taxes? in Deductions & credits

If I lent money out to a friend, and in the event I am not paid back, can I write this loss off on my taxes?

andrew_miller789 — Sun, 29 Sep 2019 18:09:28 GMT

Re: If I lent money out to a friend, and in the event I am not paid back, can I write this loss off on my taxes?

DoninGA — Sun, 29 Sep 2019 18:16:03 GMT

See IRS Tax Topic No. 453 Bad Debt Deduction - https://www.irs.gov/taxtopics/tc453

Nonbusiness Bad Debts - All other bad debts are nonbusiness. Nonbusiness bad debts must be totally worthless to be deductible. You can't deduct a partially worthless nonbusiness bad debt.

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.

Report a nonbusiness bad debt as a short-term capital loss on Form 8949, Sales and Other Dispositions of Capital Assets (PDF), Part 1, line 1.

Re: If I lent money out to a friend, and in the event I am not paid back, can I write this loss off on my taxes?

macuser_22 — Sun, 29 Sep 2019 18:33:23 GMT

unless yiu have a written loan agreement with the terms of the loan, it will be hard to establish that this was a true loan.

As stated above, it is not necessary to actually sue to collect the debt, but you must show that you could not collect even if you did sue, such as having proof that the debtor has files for bankruptcy, is insolvent, is relocatable, or other valid reason that you can establish to the IRS's satisfaction - that is often not easy to do.

Also see:

https://www.irs.gov/pub/irs-pdf/p550.pdf page 5

Genuine debt required.

A debt must be
genuine for you to deduct a loss. A debt is genuine
if it arises from a debtor-creditor relationship
based on a valid and enforceable obligation
to repay a fixed or determinable sum of
money.

Loan or gift. For a bad debt, you must
show 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. You cannot take a
bad debt deduction for a gift. There cannot be a
bad debt unless there is a true creditor-debtor
relationship between you and the person or organization
that owes you the money.

.

Re: If I lent money out to a friend, and in the event I am not paid back, can I write this loss off on my taxes?

Anonymous — Sun, 29 Sep 2019 19:11:06 GMT

the point trying to be made is if you write it off and are audited, the agent may ask you to prove it was a loan rather than a gift. a written agreement is much better than a verbal one. from the other party's perspective, it's better if he says it's a gift because he will not pay taxes on it. whereas if he says its a loan, then there's "forgiveness" which is supposed to be included in his tax return as income.

if he made repayments and maybe paid you interest which you could prove , you would likely prevail without a written agreement

don't know how much is involved, but net capital losses are limited to $3,000 per year ($1,500 if married filing separately)