Non-Business Bad Debt

[PW8]

I have a personal loan with a relative that was secured with a promissory note and a lien on her property that was filed with the state. The loan has been determined to be uncollectible for a lot of reasons.

Is my bad debt write off for the principal only?

For the principal and stated interest? Or for the amount that the attorneys tried to collect (this amount with its own docket number includes principle, interest and legal fees).

Thank you in advance for any assistance.

[JohnW152]

The amount you can claim is the principal only.

According to 2020 Publication 550, To deduct a bad debt, you must have a basis in it—that is, you must have already included the amount in your income or loaned out your cash.  

The basis of nonbusiness bad debt would be the amount that you loaned out.

Legal fees related to nonbusiness tax issues aren’t deductible.  Please see Can I Deduct Legal Fees on My Taxes? - TurboTax Tax Tips & Videos for more information.

To enter your Nonbusiness Bad Debt in TurboTax Online:

1. If you’re on the Hi TurboTax Client, let's keep working on your taxes! screen, click the Pick up where you left off button

2. Click Federal in the left pane, if you’re not already there

3. Click Deductions & Credits in the banner

4. Scroll down and click Show more to the right of Other Deductions and Credits

5. Click Start to the right of Nonbusiness Bad Debt

6. Enter all relevant information on the subsequent screens