I had a $250k loss from a defaulted promissory note. I also had a $100k long term capital gain from a home sale. Can I offset this capital gain with this loss?

Forum|Forum|6 years ago
June 1, 2019
6 replies
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The defaulted note was from a 7 year old court ordered loan to my ex-wife so she could buy me out of a business we owned while married. She defaulted then filed bankruptcy after I started legal collection efforts. The capital gain is from the sale of a rental property I owned for 10 years.

TurboTax Self Employed Online

Best answer by TaxGuyBill

Unfortunately, no.

It seems you have a "nonbusiness bad debt", which is treated as a short-term capital loss. The sale of your rental property is reported on Part 3 of Form 4797, which bypasses Schedule D and goes directly to Form 1040.

The result is that you can only deduct $3000 per year for your "nonbusiness bad debt" (unless you have other Schedule D capital gains to offset it).

That means you will report $100,000 of income from the sale of the rental, and have a deduction of $3000 for the bad debt.

Carl11_2

No. Your rental property is passive income, while the business sale is not. You can only use passive expenses to offset passive income. The defaulted buyout of the business is not a passive loss. Therefore you can't use it to offset your passive gains.
I also question if you actually have a loss. If you were not paid for the business, then in the bankruptcy I would expect she lost the business back to you. If so, there is no loss I can see, based on the limited information you've provided at this point.

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Anonymous

The business was incorporated and also filed bankruptcy and was sold by the bankruptcy court. So there was in fact a loss, a defaulted promissory note with a $250k balance.

Carl11_2

So you personally are involved in the bankruptcy? If so, most likely TurboTax can not handle your situation. No two bankruptcies are the same (EVER) and the rules differ not only from state to state, but from county to county in some states. You may need to let a tax pro in your local jurisdiction handle the taxes for the year of bankruptcy.

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Anonymous

I had nothing to do with the bankruptcy accept as a creditor.

Critter

I agree ... seek QUALIFIED professional help with your situation since you should not take tax advice from a faceless public forum no matter how good the answers may sound since we cannot be used as a qualified opinion if the IRS audits your return.

T

TaxGuyBillAnswer

Unfortunately, no.

It seems you have a "nonbusiness bad debt", which is treated as a short-term capital loss. The sale of your rental property is reported on Part 3 of Form 4797, which bypasses Schedule D and goes directly to Form 1040.

The result is that you can only deduct $3000 per year for your "nonbusiness bad debt" (unless you have other Schedule D capital gains to offset it).

That means you will report $100,000 of income from the sale of the rental, and have a deduction of $3000 for the bad debt.