tax newbie1 Posted February 21, 2010 Report Share Posted February 21, 2010 I have a client that let a real estate developer borrow $50,000 in a form of a promissory note. The real estate developer filed for bankruptcy and defaulted on the note. How do I report this on his tax return? Do I treat this like a schedule D capital gains/losses transaction and subject to $3,000 limitation? Thank you for your help Quote Link to comment Share on other sites More sharing options...
kcjenkins Posted February 21, 2010 Report Share Posted February 21, 2010 The first question is what was the context of this loan? Was there a business reason for the loan? There are several court cases supporting taking business loss if there is a clear business relationship to the loan. Quote Link to comment Share on other sites More sharing options...
OldJack Posted February 21, 2010 Report Share Posted February 21, 2010 Sounds like a non-business bad debt deductible only on 1040 Sch-D. Quote Link to comment Share on other sites More sharing options...
tax newbie1 Posted February 22, 2010 Author Report Share Posted February 22, 2010 Hi KC and OldJack, The developer uses the fund to build restaurants, shopping center and hotel. It seems to me that he invested in a bad junk bond because there was no clear business relationship to the loan. The borrow promised to pay seven equal payments at a fix rate of 25% (it just too good to be true). Do you think it should go to schedule D? Thank you for your help Quote Link to comment Share on other sites More sharing options...
OldJack Posted February 22, 2010 Report Share Posted February 22, 2010 A non-business bad debt (promissory note personal investment) would be deducted on 1040 Sch-D subject to the $3,000 net loss limitation and carryover. Quote Link to comment Share on other sites More sharing options...
jainen Posted February 22, 2010 Report Share Posted February 22, 2010 >>The borrow promised to pay seven equal payments at a fix rate of 25%<< In my opinion, that's a felony called usury. As there was never any enforceable debt, there is no deductible loss. Quote Link to comment Share on other sites More sharing options...
tax newbie1 Posted February 22, 2010 Author Report Share Posted February 22, 2010 Thank you for all your helps. I will claim it as a non-business bad debt and deduct it on schedule D subject to $3,000 net loss limitation. Quote Link to comment Share on other sites More sharing options...
michaelmars Posted February 22, 2010 Report Share Posted February 22, 2010 >>The borrow promised to pay seven equal payments at a fix rate of 25%<< In my opinion, that's a felony called usury. As there was never any enforceable debt, there is no deductible loss. HOW can 25% be usury if credit cards charge 29.99? i though 30% was usury. were you being sarcastic or is 25% the real number?? Quote Link to comment Share on other sites More sharing options...
chadw Posted February 22, 2010 Report Share Posted February 22, 2010 HOW can 25% be usury if credit cards charge 29.99? i though 30% was usury. were you being sarcastic or is 25% the real number?? I believe it depends on if the loaner is a qualified financial instituion. It also varies from state to state as well for the interest rates. Quote Link to comment Share on other sites More sharing options...
OldJack Posted February 22, 2010 Report Share Posted February 22, 2010 I doubt a violation of the usury laws would negate the fact that the taxpayer has a deductible income tax loss. If it did why would a retail store theft loss be deductible. Quote Link to comment Share on other sites More sharing options...
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