If you make a personal loan to a family member or friend, are you out of luck if he or she doesn’t pay you back? Actually, you may be able to deduct “bad debt” as a short-term capital loss if you follow the rules: 1) You must have made a bona fide loan, not a gift. Generally, this means you and the borrower signed a promissory note documenting the loan terms and charging interest. 2) You must document your “reasonable” attempts to collect. 3) The debt must be 100% worthless, meaning you have no reasonable expectation of being repaid. You can deduct the debt the year you discover it’s uncollectible. Capital loss limits apply, but unused losses may be carried forward. Contact us for help.
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