Non business bad debt? for losses from contractor that abandoned home renovation project and left it incomplete.

[oobi]

We paid a contractor for work that he never finished on a renovation project on our primary home.

We brought him to court and won and received his entire contractors surety bond but it didn't make us whole. 

He filed for bankruptcy so couldn't pay.  So now it seems like this is a non business bad debt that became totally worthless last year once we won our lawsuit and received his surety bond money.  We had to hire a new contractor to finish the work.  

Can I deduct the construction losses and non business bad debt from my taxes?

Since this was for our personal home, is this a deductible loss?

[ColeenD3]

No, personal losses are not deductible. You can't deduct construction losses.

If someone owes you money that you cannot collect, you have a bad debt. You may be able to deduct the amount owed to you when you figure your tax for the year the debt becomes worthless. 

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.

When deductible. You can take a bad debt deduction only in the year the debt becomes worthless. You do not have to wait until a debt is due to determine whether it is worthless. A debt becomes worthless when there is no longer any chance that the amount owed will be paid. It is not necessary to go to court if you can show that a judgment from the court would be uncollectible. You must only show that you have taken reasonable steps to collect the debt. Bankruptcy of your debtor is generally good evidence of the worthlessness of at least a part of an unsecured and unpreferred debt.

The actual task of reporting a bad debt is relatively simple. The steps are:

• Complete Form 8949 Sales and Other Dispositions of Capital Assets
• Enter the amount of the debt on line 1 in part 1, and write the name of the debtor in column (a)
• Enter your basis in column (e)—the amount of money that has not been paid back
• In column (d), write 0—the amount the borrower did not repay

The IRS also requires that you attach a bad-debt statement to your tax return, explaining the details of the loan you made. You must deduct a bad debt in the year it becomes worthless. If you realize you could have reported and taken a deduction for an unpaid debt years ago but didn't, you generally have only three years to amend your return in order to claim it on your tax return.

[oobi]

Could this be considered a Theft Loss?

Can Theft losses be deducted?

[oobi]

Can Theft losses be deducted?

Could this be considered a Theft Loss?

[ColeenD3]

It is more of a bad debt.

A theft is the taking and removal of money or property with the intent to deprive the owner of it. The taking must be illegal under the law of the state where it occurred and must have been done with criminal intent. The amount of your theft loss is generally the adjusted basis of your property because the fair market value of your property immediately after the theft is considered to be zero.

Topic 515

[oobi]

So is this a nonbusiness bad debt that I can deduct then?

TurboTax Help says: "You can take a bad debt deduction for the amount you deposit with a contractor if the contractor becomes insolvent and you are unable to recover your deposit"

In our case, our contractor abandoned our home renovation project, leaving it incomplete.

He then filed for bankruptcy, so we could not recover the deposits that we paid him for work he didn't complete.  We recovered some money from his surety bond, but his bankruptcy prevented us from recovering any more.

[ColeenD3]

Yes. It is deductible. Enter it in the investment section.

How to report the loss

The actual task of reporting a bad debt is relatively simple. The steps are:

• Complete Form 8949 Sales and Other Dispositions of Capital Assets
• Enter the amount of the debt on line 1 in part 1, and write the name of the debtor in column (a)
• Enter your basis in column (e)—the amount of money that has not been paid back
• In column (d), write 0—the amount the borrower did not repay

The IRS also requires that you attach a bad-debt statement to your tax return, explaining the details of the loan you made. You must deduct a bad debt in the year it becomes worthless. If you realize you could have reported and taken a deduction for an unpaid debt years ago but didn't, you generally have only three years to amend your return in order to claim it on your tax return.

Bad Debt

[oobi]

Is there a way to attach a bad debt statement to Form 8949 in Turbotax?

[ee-ea]

You can add statements to a 1040 form if you mail it in.

[kpankpow]

I know this post is 3 years old, but I'm in this same situation. In my case, the contractor bankruptcy was closed out in February 2025, so do I take the bad debt deduction in my 2024 return (current filing) or next years (2025), since the debt became officially worthless in 2025? Second question - am I limited to the $3000 capital loss deduction per year? And if so, do I deduct $3000 each year going forward until it's all accounted for? Thanks

[DaveF1006]

No, you would not be able to classify this as a non-business bad debt because these generally apply to personal loans or debts that individual lend to others, which become uncollectible.  In this case, you didn't lend anything but instead, entered into a contract which is not a debt instrument. 

Since, you entered into a contract, you experienced is a breach of contract. Since the contractor claimed bankruptcy, you may not have grounds for legal action but you may wish to consult with a legal professional to discuss possible remedies.