During 2017, Wan-Ying, a lawyer, made a bona fide $5,750 loan to her friend Bill when he was in a time of need. Bill died in 2018. Wan-Ying has been informed by Bill's estate that he was insolvent. What is her deduction ton her 2018 tax return (she has no other capital transactions)?

Question

Quizplus · Accepted Answer

Wan-Ying can deduct up to $3,000 of the loan as a non-business bad debt on her tax return. The remaining $2,750 can be carried over to future years as a capital loss deduction. Since the loan was a bona fide loan, meaning it was made with the intention of being repaid, it qualifies as a non-business bad debt. The fact that Bill was insolvent at the time of his death means that Wan-Ying is unlikely to be able to recover the loan, making it a bad debt. However, she can only deduct up to $3,000 of the loss in a given tax year.

During 2017, Wan-Ying, a Lawyer, Made a Bona Fide $5,750