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How to deduct a personal loss

Posted on: 01st Mar, 2010 05:26 pm
I provided a homeowner $20,000 to complete their home, years ago. I hold a 3rd note, which is recorded. In the past years, a collection agency has collected montly payment (interest only) from this note. They stopped paying in 2008. No payments in 2009. I want to "write this note off" on my 2010 taxes.

In the past years, I would receive a 1099 from the collection agency in the amount collected. This was all interest, so I put the amount with description directly on Schedule B these past few years. The $20,000 was taken from my equity line. So, I declared the interest on Schedule A, "home mortgage".

I understand now, that I should have place both interests on different lines of these schedules, but was told it would not make a difference on the bottom line of my 1040.

In writing the $20,000 of as a personal loss, I'm confused on where to declare this loss. I never used a Schedule C for this loan.

I tried to enter this loss on line 10 of the 1040, Capital gains & loss. I simply overwrote on this line a negative 20,000. It worked ok for me on my 1040, but for my CA tax form, it failed, due to a low value.

There is also a way using the same line for a $3,000 loss per year, but I would like to take it all in 1 year.

Thank you,
Hi gorebygone,

You should be able to deduct the loss as bad debt loss if you can prove that you made every possible effort to collect it, but the bad debt was irrecoverable. You will also have to decide if you want to deduct it as a business related or non-business related bad debt. Business related bad debts can be fully deductible as an ordinary loss, while non-business bad debt can be deducted as a capital loss.

You can fully deduct capital losses against capital gains against your capital gains on the form 1040, schedule D. In case the capital losses exceed the capital gains, you can deduct the excess on your tax return up to a limit of $3000 or $1500 if you are married and filing separate tax return. However, I think you should consult a tax consultant or an account in this regard as they are the best people to help you with this.
Posted on: 02nd Mar, 2010 10:40 pm
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