How to "realize" a loss on a bad debt - Tax question

[Bret Lorenson]

Question for all you tax experts…..I sold a house using seller financing about 5 years ago. Not a contract for deed. Basically I was the mortgage lender. The buyer of the house could no longer afford the house so we agreed to do a short sale. We released the mortgage from from the property, but did not satisfy the note, meaning our original buyer was still obligated to pay difference between what was owed on the note and the proceeds from the short sale amount. Basically they owed about 150k and short sale amount was 125k, so they still owed 25k on the note. They have not paid us anything since then. The short sale amount left us with an overall loss on the property. We would now like to realize the loss to offset some other gains in 2013. Is there anything we have to do to formally "realize" these losses on the bad debt for 2103.

[Steven Hamilton II]

Originally posted by @Bret Lorenson:

Question for all you tax experts…..I sold a house using seller financing about 5 years ago. Not a contract for deed. Basically I was the mortgage lender. The buyer of the house could no longer afford the house so we agreed to do a short sale. We released the mortgage from from the property, but did not satisfy the note, meaning our original buyer was still obligated to pay difference between what was owed on the note and the proceeds from the short sale amount. Basically they owed about 150k and short sale amount was 125k, so they still owed 25k on the note. They have not paid us anything since then. The short sale amount left us with an overall loss on the property. We would now like to realize the loss to offset some other gains in 2013. Is there anything we have to do to formally "realize" these losses on the bad debt for 2103.

@Bret Lorenson ,

I'm assuming this property was not a project you flipped. I also assume you have tried other collection measures or are forgiving the debt. Your 25k loss will be included on Schedule D to your net capital gain/loss. It can lower your net capital gain until used up. The 3k is the maximum amount of loss you can show on your Schedule D in any given year.

30k in capital gains minus a 25k loss = 5k in gain.

20k in gains minus 25k loss = -3k loss. 2k will be carried over to next year.

You will issue a 1099-C to the taxpayer and you will claim a bad business debt on Schedule D.