| Can't
Collect on Loan You Made?
A
sad but common experience is that you've made a personal
loan to a friend or family member and they can't or won't
pay you back.
The
good news is that you may qualify for a tax deduction to
help recover some of your money. Here's a quick summary
of the rules (business loans have different rules).
One:
The loan must be worthless. Two: You can take a deduction
for a bad loan only in the year that it becomes completely
worthless
So you
take the write-off when it becomes clear that you're not
going to collect any of the money that's still unpaid. The
loss may be limited.
Uncollectible
personal loans are considered short-term capital losses.
You combine your loan loss with your other investment gains
and losses.
Your
combined net loss is limited to $3,000 in any year, but
you can carry forward unused amounts to future years.
You'll
need documentation. You must have evidence of the loan amount
and the fact that it is worthless.
Ideally
you should put something in writing when you make the loan,
even though that can be difficult to do with family members.
Failing
that, try to get a letter acknowledging the loan amount
and keep a copy of any check you wrote.
You
also need to show that you've made efforts to collect on
the loan and that your efforts have been unsuccessful. Keep
notes of your collection attempts and the results.
Remember,
the better your documentation, the better the chance that
the deduction will stand up if your return is audited by
the IRS. |
