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Posted by jack on September 30, 2008, 9:30 pm
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> jack wrote:
>>>> I lent someone money and he put up gems that exceeded the value of the
>>>> loan as collateral. He defaulted on the loan and I now have the gems.
>>>> Sadly the market for gems has tanked and I will take a loss on it.
>>>>
>>>> I realize I can't take the loss until I sell the gems; but when I do,
>>>> how does it fit on tax return? Is it a loss on the loan? If so, does
>>>> it go against ordinary income, or is something else?
>>>> Or is it a capital loss, since the gems originally covered the loan but
>>>> lost value?
>>>
>>>
>>> If you're not in the business of making loans, as I suspect, the loss
>>> would be a capital loss and reported on Schedule D. The "sale" price is
>>> what you got out of it (the cash from the gem sale) and your cost basis
>>> is the amount you loaned initially.
>>>
>> I poked around in TaxCut and under "help" is agrees with you; capital
>> loss on Schedule D, but it doesn't have any means to enter it.
>> I guess it goes in like any other investment; purchase price is what I
>> lent; and sale price is what I sold (when I actually do that, of course)
>> the gems for.
>> I have been selling the gems for 5 years now and they are about half
>> gone; can I just put in a single date and price at the end?
> You never actually stated whether this was a nonrecourse loan. I.e., your
> only recourse to collect was the collateral if the debtor defaulted. If it
> was a nonrecourse nonbusiness loan, you can not take a loss (Part I of
> Schedule D) until the loan is worthless. This would occur when you sell
> off the last piece of collateral.
>
> If this was not a nonrecourse loan, then you can not take a loss until you
> have actually attempted to obtain the balance due from the debtor. You
> must take reasonable steps to collect the outstanding balance. Once you
> have determined that there is no reasonable way to collect, you can write
> off the balance due.
>
> Here are the instructions from PUB 550 on how to write off a nonbusiness
> bad debt.
>
> On Schedule D, Part I, line 1, enter the name
> of the debtor and “statement attached” in column (a). Enter the amount of
> the bad debt in parentheses in column (f). Use a separate line for each
> bad debt.
> For each bad debt, attach a statement to your return that contains:
> • A description of the debt, including the amount, and the date it became
> due,
> • The name of the debtor, and any business or family relationship between
> you and the debtor,
> • The efforts you made to collect the debt,
> and
> • Why you decided the debt was worthless.
>
> For example, you could show that the borrower has declared bankruptcy, or
> that legal action to collect would probably not
> result in payment of any part of the debt.
>
It is a non-recourse loan; simply letting me have the collateral doesn't
clear the debt. However I have been unable to contact them for two years
despite trying, and their lawyer hasn't heard from them in longer than that;
so they presumably don't exist any more.
They didn't personally guaranty the loan, and the company surely has no
assets.
Thanks.
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