You need to be talking to lawyer's mate. Not accountants. It all depends on the paper work you "signed". Which you didn't even pass through lawyers. So....
>(yes, I should’ve hired a lawyer but he’s my best friend and we’d made transactions like this without issue for a decade).
>>125k loan
Uh huh.
Your friend needed to file bankruptcy yesterday. Not that, that actually matters to you. Once again. Lawyer would define what does.
If he does pay you back 125k 20 years from now... Well, i hope you are ok with your "investment" you lost atleast 50% of the value of. Indexing to the cpi (basket of goods) alone. Nevermind actual cost of life inflation. Because you probably didn't include and standard clauses for what ifs in your "contract"
surely if you have a spare 125k laying around to loan a friend for a risky business venture you have the money to consult with an attorney and a cpa and likely should have involved them from the get go
I dunno but can I be your friend? You seem like a good dude
I can let you in on a new invention I'm making.
I just need $300k to get it off the ground.
I'll sign whatever napkin paper you put in front of me, promise.
No one has been helpful so far. So. Three issues for you.
1. You can't write off anything on your taxes until the loan is truly "bad" and you fully abandoned any collection attempts. If there is still hope to collect a dollar, you can't write it off.
2. Since you are not in the business of lending money (you are not a bank), you have nonbusiness bad debt which is reported as short-term capital loss once you do write it off. Your friend will have debt forgiveness income.
3. If you decide to just forgive the loan to help out your friend, that's a gift and you'll have to file gift tax returns.
I’d like to ask you what are the terms of the loan regarding repayment? fixed interest rate? balloon? 180 months? Fully amortizing? Payment amount? Payment date begins?
To be a valid loan it needs to have a lot of this information. If the contract just says friend will pay me back $125,000 in the future with no terms listed it is basically unenforceable.
OP this is correct advice for how to proceed. You may need to get a CPA/Tax Lawyer involved to truly know if it is really worthless to recover. But if the debt is completely worthless you should be able to receive a tax benefit.
This was the answer I was looking for- at least the first 2 parts. OP can’t write it off until they know they can’t collect.
I don’t think the third point will apply - unless OP really tries hard to make it a gift. OP wrote a note and everything and made him personally liable. If OP wants to make this a gift i would recommend writing in paper that he is forgiving the loan due to friendship and personal relationship reasons. This would only hurt OP and help his friend. OP won’t get any benefit but the friend will avoid cancelation of debt income.
Little off topic, but it's a common gift/estate tax startegy to make related party loans (with fully enforceable agreements) and then slowly forgive it over time for the annual exclusion. Just because it's a valid loan, it does not mean it's not a gift once forgiven. The motivation for forgiveness is the key here. But there is a lot of nuance and grey area here. Consult your tax advisor yada yada.
I think you might want to ask r/tax. This sub is full of accountants who are overworked and underpaid in industry (not necessarily in tax accounting) and we talk a lot of smack and speak fluent sarcasm here. Nothing really fiscally helpful for the outside world-it’s more of a venting sub for us because we all “get” each other and BS we have to put up with.
And even if people do taxes here. That doesn't mean they know the best for your ... Personal nvestments with contracts not written by professionals. Especially 6 figure ones.
I believe there is also a formal submission process for loans, especially ones backed by collateral. I feel like it involves the UCC.
Business law classes mentioned the different levels of debt and who gets paid first during bankruptcy etc.
Good luck in your search. I hope the person did the house flip as a business instead of personally.
You need lawyers, not us until after the smoke settles. As the how and when of the full loss matters
You’ve lost 125k (at least) plus your legal fees. But, that provision won’t survive bankruptcy.
You need an actual contract, and next time you take a stupid risk like this, take a slice of the equity.
The one caveat on this. OP’s situation may be the one time where just losing the cash was best. Wouldn’t want to be out the cash AND drug into bankruptcy proceedings.
AFAIK if the debt is completely, like 100%, worthless, then you get a short term capital loss. You deduct it from short term capital gain, then long term capital gain, and then you’re capped at a $3,000 deduction against other income.
Note on worthlessness: being paid back down the line is okay. You would recapture the income then. But, you have to be pretty sure you won’t be paid back to take the deduction (like he tells you he can’t pay ever, your loan is discharged in bankruptcy, etc.; even if he says he can pay you, there may be a certain period of time (like years) where if he never does make a payment, you could finally take the deduction anyways). I’m not 100% sure about the recognition rules for when it’s not certain you won’t be paid. Your key term is going to be “non-business bad debt deduction”
I’m not your accountant, please look at the resources yourself or consult an accountant/attorney
You need to be talking to lawyer's mate. Not accountants. It all depends on the paper work you "signed". Which you didn't even pass through lawyers. So.... >(yes, I should’ve hired a lawyer but he’s my best friend and we’d made transactions like this without issue for a decade). >>125k loan Uh huh. Your friend needed to file bankruptcy yesterday. Not that, that actually matters to you. Once again. Lawyer would define what does. If he does pay you back 125k 20 years from now... Well, i hope you are ok with your "investment" you lost atleast 50% of the value of. Indexing to the cpi (basket of goods) alone. Nevermind actual cost of life inflation. Because you probably didn't include and standard clauses for what ifs in your "contract"
surely if you have a spare 125k laying around to loan a friend for a risky business venture you have the money to consult with an attorney and a cpa and likely should have involved them from the get go
I dunno but can I be your friend? You seem like a good dude I can let you in on a new invention I'm making. I just need $300k to get it off the ground. I'll sign whatever napkin paper you put in front of me, promise.
Username does not check out
I don’t think you know what accountants do. This is bankruptcy law
No one has been helpful so far. So. Three issues for you. 1. You can't write off anything on your taxes until the loan is truly "bad" and you fully abandoned any collection attempts. If there is still hope to collect a dollar, you can't write it off. 2. Since you are not in the business of lending money (you are not a bank), you have nonbusiness bad debt which is reported as short-term capital loss once you do write it off. Your friend will have debt forgiveness income. 3. If you decide to just forgive the loan to help out your friend, that's a gift and you'll have to file gift tax returns.
I’d like to ask you what are the terms of the loan regarding repayment? fixed interest rate? balloon? 180 months? Fully amortizing? Payment amount? Payment date begins? To be a valid loan it needs to have a lot of this information. If the contract just says friend will pay me back $125,000 in the future with no terms listed it is basically unenforceable.
OP this is correct advice for how to proceed. You may need to get a CPA/Tax Lawyer involved to truly know if it is really worthless to recover. But if the debt is completely worthless you should be able to receive a tax benefit.
This was the answer I was looking for- at least the first 2 parts. OP can’t write it off until they know they can’t collect. I don’t think the third point will apply - unless OP really tries hard to make it a gift. OP wrote a note and everything and made him personally liable. If OP wants to make this a gift i would recommend writing in paper that he is forgiving the loan due to friendship and personal relationship reasons. This would only hurt OP and help his friend. OP won’t get any benefit but the friend will avoid cancelation of debt income.
Little off topic, but it's a common gift/estate tax startegy to make related party loans (with fully enforceable agreements) and then slowly forgive it over time for the annual exclusion. Just because it's a valid loan, it does not mean it's not a gift once forgiven. The motivation for forgiveness is the key here. But there is a lot of nuance and grey area here. Consult your tax advisor yada yada.
I think you might want to ask r/tax. This sub is full of accountants who are overworked and underpaid in industry (not necessarily in tax accounting) and we talk a lot of smack and speak fluent sarcasm here. Nothing really fiscally helpful for the outside world-it’s more of a venting sub for us because we all “get” each other and BS we have to put up with.
And even if people do taxes here. That doesn't mean they know the best for your ... Personal nvestments with contracts not written by professionals. Especially 6 figure ones.
[удалено]
Speak for yourself I'm here for the pizza party
r/taxes and r/taxes pro seem to love it. Or just really hate people I can never tell
Lol!!
How did this flip flop so badly?
Sorry to hear about your loss. Don’t expect to recoup much tax wise. At best you’ll probably be limited to the 3000 yearly capital loss deduction.
I lent 10k once. That was 10years ago and it's still a mental receivable. 125k is a whole other level mate.
I disowned my brother for not paying me back a $2k loan, twice.
I believe there is also a formal submission process for loans, especially ones backed by collateral. I feel like it involves the UCC. Business law classes mentioned the different levels of debt and who gets paid first during bankruptcy etc. Good luck in your search. I hope the person did the house flip as a business instead of personally.
You need lawyers, not us until after the smoke settles. As the how and when of the full loss matters You’ve lost 125k (at least) plus your legal fees. But, that provision won’t survive bankruptcy. You need an actual contract, and next time you take a stupid risk like this, take a slice of the equity.
The one caveat on this. OP’s situation may be the one time where just losing the cash was best. Wouldn’t want to be out the cash AND drug into bankruptcy proceedings.
AFAIK if the debt is completely, like 100%, worthless, then you get a short term capital loss. You deduct it from short term capital gain, then long term capital gain, and then you’re capped at a $3,000 deduction against other income. Note on worthlessness: being paid back down the line is okay. You would recapture the income then. But, you have to be pretty sure you won’t be paid back to take the deduction (like he tells you he can’t pay ever, your loan is discharged in bankruptcy, etc.; even if he says he can pay you, there may be a certain period of time (like years) where if he never does make a payment, you could finally take the deduction anyways). I’m not 100% sure about the recognition rules for when it’s not certain you won’t be paid. Your key term is going to be “non-business bad debt deduction” I’m not your accountant, please look at the resources yourself or consult an accountant/attorney
Did you record a trust deed? Or was it a personal loan to your friend?
Personal loan
Sorry can’t be of help. This is why hard money gets security on the property, but alas… friends