Bad Debt Loss - Co-Signer

[Burke]

Can a TP take a bad debt loss for a legal note he co-signed and had to pay because the primary signer defaulted? Primary signer is the one who got the money/goods and co-signer just lost the $$$ when he had to pony up to protect his credit.

[luke]

I would say NO - and DON'T co-sign for anyone for any reason ("No good deed goes unpunished").

[Zee]

Based on the information provided, I would agree there is no bad debt unless it can be demonstrated that the reasons for the making the guarantee was to protect an investment or the client entered into the transaction with a profit motive.

[Snaggletooth]

No and Don't Do It

I like what Luke said, and he was very succinct.

As far as the taxpayer is concerned, there was never any loan to begin with, the most generous thing that can be said is that it wasn't an arms length transaction. The existence of a cosign requirement should announce to the whole world that the banks have already given up on the borrower.

If there was consideration involved for signing the loan, the complexion might be different. However the cosigner would have to stand to receive taxable income under the arrangement.

Most cosign arrangements are between family members. (Mortimer has a credit record only a mother would love, etc.) I think the prohibition against taking a loss on related party transactions would also preclude the reporting of a loss on Sch D for a non-business bad debt.