Legal Question in Tax Law in Arizona

How to write off non-business bad debt

I was a fool and sold $5,000 worth of my Mutual funds (huge cap gains) to lend a friend the money for a car last year. He promised to repay and I've been after him for over a year, to no avail. I'll never see the money. I want to write it off as a bad debt. How do I go about doing that and which form is used. I'm using turbo tax online to file. One more thing..Is there any way possible to include the cap gains as part of the debt to me..Thank you Donna


Asked on 1/20/02, 9:40 pm

1 Answer from Attorneys
Robert Lord Berens, Kozub & Lord PLC

Re: How to write off non-business bad debt

I'm not sure of which form is used, but be careful here. The bad debt will give rise to a short term capital loss. If you offset the short-term capital loss against the long-term capital gains, it may not give you as good a tax result as if you offset the short term capital loss against ordinary income. However, you generally are limited to 3000 per year of capital losses that may be offset against ordinary income. The bottom line is that you need to think through the timing of the bad debt loss. You have some flexibility here, and having the debt become worthless in 2001 could be a different result than it becoming worthless in 2002.

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Answered on 1/23/02, 2:14 am


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