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Financial Planning / Tax Strategies


Subject:  Re: Collateral taken Date:  9/2/2011  4:40 PM
Author:  JAFO31 Number:  113894 of 123036

ncredbear: <<<With the economic climate, I placed $20,000 in a CD that I pledged as collateral for a bank loan for my brother and his partner's business. This was 3 years ago. The businees continued to suffer and they were unable to keep up the loan payments. 2 months ago the bank took about $15,000 of the CD to cover the loan. Can I show this as a loss on my taxes? If so what is the proper way to do so? This assumes my brother and partner do not repay me any of the money, which I doubt will happen anytime in the next several years, if at all.>>>

ptheland: "Sounds like a non-business bad debt. On your tax return, it is reported as a short-term capital loss. There's an additional statement you need to attach to your tax return when claiming a non-business bad debt. Publication 550 has the details on that statement. "

Peter - our link confused me.

First it contains the following text:

"Deductible nonbusiness bad debts. To be deductible, nonbusiness bad debts must be totally worthless. You cannot deduct a partly worthless nonbusiness debt.

Genuine debt required. A debt must be genuine for you to deduct a loss. A debt is genuine if it arises from a debtor-creditor relationship based on a valid and enforceable obligation to repay a fixed or determinable sum of money.

Loan or gift. For a bad debt, you must show there was an intention at the time of the transaction to make a loan and not a gift. If you lend money to a relative or friend with the understanding that it may not be repaid, it is considered a gift and not a loan. You cannot take a bad debt deduction for a gift. There cannot be a bad debt unless there is a true creditor-debtor relationship between you and the person or organization that owes you the money.

Op did not mention any written agreement between OP and his broether and brother's partner. Is the common law right of subrogation sufficient to establish a creditor-debtor relationship?