Question

Can a loss due to a court ordered money judgement owed to me be deducted on my personal taxes? This was an old evicted tenant.

Forum|Forum|3 years ago
September 16, 2022
3 replies
0 views

We won a judgement against a tenant. Firm was attempting to collect for several years. They have not received any money for a long time. There is still a few thousand dollars owed. Can this be deducted on this years return?

TurboTax Live Premier Online

B

Bsch4477

Employee

You can’t deduct it but on the bright side, you don’t pay tax on that income.

O

Opus 17

Employee

You can't deduct anything that was never reported in your income in the first place. If you use accrual based accounting, and booked the rent revenue and paid tax on it at the time (even though you didn't receive it) you have an adjustment now, but it would be on your schedule E, not your personal return. Assuming you are a cash-based taxpayer and only pay tax on income when it is actually received, the fact that you never received the income means you never pay tax on it. That's your tax "reduction." You can't subtract an item from your income that was never included in your income.

O

Opus 17

Employee

Also, a "non-business bad debt" on your personal return must be just that, non-business. Some money that was already included in your taxable income, that you paid out and lost. (Like, paying for a home improvement that was never performed. The money came from your after-tax income, so in some cases you can deduct it from your income when it is lost. But, there are important tax distinctions between theft and a bad debt that must be considered as well.)

Here, since this is a business debt, it can never be reported on your personal tax return, even if it was a deductible loss, which it is not as I explained elsewhere.

Now, if you had to make repairs, those expenses should have been reported on your schedule E at the time. Since you paid expenses for repair, that reduced your taxable income at the time, and therefore your tax. If the judgment had been paid, it would have been taxable income.

C

cstanley2010-gmaAuthor

I should probably give more details, though I don't know if it would change the answer. We moved out of a house. A person agreed to do a lease to buy of our home. He defaulted. On purpose it seems as it was later discovered he was a criminal. He sued us for breach of contract. We counter-sued. We won and the judge made him pay for missed rent, attorney fees,etc. A collection firm attempted to collect the debt for the last 10 years. He would pay $100 every now and then. There is still the majority of it owed. The collection firm notified that after 10 years, we can renew the collection efforts. I'm trying to figure out if it's worth it to keep trying to collect, or if there is something I could do on my taxes, now that this has essentially become a worthless bad debt loss. Non-business.

O

Opus 17

Employee

@cstanley2010-gma wrote:

I should probably give more details, though I don't know if it would change the answer. We moved out of a house. A person agreed to do a lease to buy of our home. He defaulted. On purpose it seems as it was later discovered he was a criminal. He sued us for breach of contract. We counter-sued. We won and the judge made him pay for missed rent, attorney fees,etc. A collection firm attempted to collect the debt for the last 10 years. He would pay $100 every now and then. There is still the majority of it owed. The collection firm notified that after 10 years, we can renew the collection efforts. I'm trying to figure out if it's worth it to keep trying to collect, or if there is something I could do on my taxes, now that this has essentially become a worthless bad debt loss. Non-business.

Well, the first question is what are your damages, and whether you are actually out of pocket in any way. For example, if the person promised to pay a deposit and never did, and after the deal fell apart you sold the house to someone else, and a judge ruled you were still owed the deposit, that's not a bad debt because it was never money you paid out, even though you were owed it. Or, if you had a deal too sell the house for $200K that fell through and you sold it to someone else for $150K, the $50K is not a "loss" (bad debt or theft) because you never realized it, even though a judge might rule you are owed it. Missed rent is rent you never received, so you never paid tax on it. It would not be deductible now under any theory, and it would be taxable income if the person paid the judgement. Other items are more complicated to consider, and I'm going to skip that for now to talk about theft losses.

The second problem is that theft losses and casualty losses are not deductible for 2018-2025 unless associated with a federally declared disaster zone. In the past, the IRS was picky about the difference between a theft loss and a bad debt, because theft losses had more favorable deductions. There was a tax court case that went something like this. John's father bought a painting for $50,000. After his death, John had it appraised and discovered it was a forgery, worth no more than $5000. John tried to deduct $45,000 as a theft loss. The IRS disallowed it, because for there to be a theft, there had to be a thief, and no one could identify in the known history of that painting who the thief might have been. (There was no evidence that any specific person in the ownership chain knowingly sold a forgery.) So the IRS said that's a capital loss, if and when you sell it.

So now that thefts aren’t deductible but bad debts are, the IRS may turn the equation around. If there is a thief, you have a theft loss, that might have been deductible when it occurred, but is not deductible now as a theft and is not considered a non-business bad debt.

If you make the argument this was a bad business deal, you might have a non-business bad debt, but it's not clear to me which parts of the judgement would qualify. Someone would have to analyze your case and your original damages. (rent that was never paid is not a deductible bad debt because it was never income, but other out of pocket expenses might be).

You may want professional assistance.