Two years ago,Gina loaned Tom $50,000.Tom signed a note the terms of which called for monthly payments of $2,000 plus 6% interest on the outstanding balance.Last year,when the balance owing on the loan was $18,000,Tom defaulted on the note.As of the end of last year,there appeared to be no reasonable prospect of Gina recovering the $18,000.As a consequence,Gina claimed the $18,000 as a nonbusiness bad debt.Last year,Gina had AGI of $60,000 which included $5,000 net long-term capital gains and $4,000 of qualified dividends.Gina did not itemize her deductions.During the current year,Tom paid Gina $13,000 in final settlement of the loan.How should Gina account for the payment in the current year?

Question

Quizplus · Accepted Answer

Gina should report $8,000 of income for the current year. The $18,000 was claimed as a nonbusiness bad debt, which is treated as a short-term capital loss. When Tom paid $13,000, Gina recovered $8,000 more than the $5,000 net long-term capital gain she had offset against the bad debt loss. Therefore, she must report the $8,000 as income.

Two Years Ago,Gina Loaned Tom $50,000