Today TaxMama hears from Ginger in San Leandro, CA, who tells us “We sold a $12,000.00 motorcycle to a friend. He was making $260.00 a month payments for 72 months. He moved to AZ and got into a wreck with the bike and the bike was totaled. Because he only paid 4 months out of 72, can we write that off on our income taxes? If so, how much?
You must be a really good friend! Lending money in today’s financial climate at nearly 16% per year! OUCH!
You can compute the interest rate, or any loan feature, when you’re missing a variable using this nifty free tool http://ray.met.fsu.edu/bret/amortize.html
Since he made only 4 payments, here’s what you’ve received: $630.08 of interest and $409.92 worth of principal. The balance when he stopped paying you is $11,590.08
First question. Doesn’t your good buddy have any insurance?
The insurance should reimburse him for the bike and he should be able to reimburse you for the balance.
Second question. When you lend that kind of money to someone on car or motorcycle or other tangible property like that, be sure to stay on title as the ‘legal owner’ until it’s paid off. Your buyer would be the ‘registered owner’. Did you do that?
If you did, his insurance company should issue the check directly to you.
Two words of advice – if you ever lend money like this –
1) Stay on title and
2) Insist on insurance, naming you as additional insured (it costs nothing extra).
Now, to the tax issue. How can you write off your loss?
Clearly, you’re not in the business of lending. So whatever you can’t collect from your friend or the insurance is a personal bad debt. That means, once you’ve exhausted all efforts to collect the balance due, you can report it on Schedule D.
The date of the loan is the purchase date. The date of the loss – whenever you’re sure there’s no way he can pay you back – is the date of the “sale”. The sales price is -0-. The cost is $11,590.08 less any insurance reimbursement you might have received.
Oh yes, and remember to report the interest you received as income.
And remember, you’ll find answers to questions about loans and all kinds of tax issues, free. Where? Where else? At TaxMama.com[Note: If you were subscribed to the e-mailed TaxQuips, you’d be getting news about the IRS Exam. Please click on the subscribe link and join us.]
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- Florida State University / Department of Meteorology :: Amortization Schedule – Compute Missing Variable