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Bad Debts – Family Loans

LoanIf you made an ill-advised loan to a family member, the saving grace is that you’re allowed to claim a nonbusiness bad-debt deduction.

Your write-off is considered a short-term capital loss. So you can use it to shelter your capital gains for the year. If the loss exceeds your gains you can write off another $3,000 against other income. ($1,500 for married filing separate status). Any remaining loss is carried forward to future tax years, when it can be deducted under the same rules.

To claim a deduction, you must show that it’s impossible to collect the loan. But you don’t need to file a lawsuit or hire a collection agency to harass your relative.

Instead, do this: Make a written demand for repayment. When that fails to produce results, write a memo to your tax file to document that your tried and failed to collect. It also helps if you can gather financial information that shows the borrower is insolvent. Claim your nonbusiness bad-debt deduction in the year you determine the loan worthless. (No deduction is allowed for partially worthless loans).


If you have any questions or require further info please call 718-531-1105 or send an email.


This web site and these articles are not tax or legal advice and are not intended as tax or legal advice.  They are intended to provide only general, non-specific legal information and are not intended to cover all the issues related to the topic discussed.  The specific facts that apply to your matter may make the outcome different than would be anticipated by you.  This web site and these articles are based on United States law.  You should consult with an accountant or lawyer familiar with the issues. This web site and the articles contained on this web site are not solicitations.

Contact Info:

Ronald Semaria
Semaria Consulting
1408 East 66th St
Brooklyn, NY 11234
Email: info@semaria.com

Phone Numbers:

Phone: 718-531-1105
Toll-Free: 866-531-1105
Toll-Free: 888-IRSAUDIT
Toll-Free: 888-RONTAXES
Fax: 718-444-7152

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