Is this Personal Bad Debt?

[equinecpa]

Client and 2 work friends are hired for a job out of town, so jointly lease a property in that town. One of the work "friends" doesn't pay their portion of lease/electric. Client covers deficiency for the balance of the lease, and is unable to recover from "friend".

They are wanting to claim as personal bad debt -I'm not sure if this qualifies or not. They want to claim the extra utilities and the extra rent paid as bad debt. Have copy of lease with 3 names.

What do you think?

[ChEAr$]

personal loss, non deductible.

[jimmcg]

Client and 2 work friends are hired for a job out of town, so jointly lease a property in that town. One of the work "friends" doesn't pay their portion of lease/electric. Client covers deficiency for the balance of the lease, and is unable to recover from "friend".

They are wanting to claim as personal bad debt -I'm not sure if this qualifies or not. They want to claim the extra utilities and the extra rent paid as bad debt. Have copy of lease with 3 names.

What do you think?

Employee or self employed? If self employed what type of business entity established. (If any.)

[equinecpa]

The job was W-2 employment.

[FEDUKE404]

Nyet

Very creative.....but personal only.

Maybe they have been watching too many infomercials or their barber gave them some friendly advice??

(I'm surprised they are not going for deducting all of their expenses while out of town.)

FE

[taxmom34]

for personal bad debt doesn't client need to use every legal means to recover debt?

[Lion]

And...

And, have a documented debt to begin with. Did he have signed loan papers documenting what was owed to him? Did he take it to small claims court? File a police report? What documentation does he have that a debt is owed to him? And, what has he done and documented to show that he tried to collect?

[Nashville]

Depends on Entity

Original post does not indicate what type of entity arrangement entered into the lease. There was some mention of a W-2 relationship but that is hard to plug into a lease situation.

If your client is reporting on a Schedule C, the simple matter is to deduct the amount of rent, utilities, and expenses he actually paid for. Then the deductibility of a bad debt is of no consequence because for tax purposes the comity never existed to begin with, and the client then gets to deduct the full economic measure of what he actually had to pay.

If the lease was entered into via a partnership or corporation, there are all manner of twists and turns depending on equities, etc.

[Burke]

Client and 2 work friends are hired for a job out of town, so jointly lease a property in that town. One of the work "friends" doesn't pay their portion of lease/electric. Client covers deficiency for the balance of the lease, and is unable to recover from "friend". They are wanting to claim as personal bad debt -I'm not sure if this qualifies or not. They want to claim the extra utilities and the extra rent paid as bad debt. Have copy of lease with 3 names. What do you think?

A jointly leased property usually means all three are responsible and the landlord can go after any one of them to recover unpaid rents. It may or may not say so in the lease. Much like a co-signed loan, each is obligated if the other does not pay. So in theory, there is a personal "loss," but not a deductible bad debt to the other parties. A separate lease for 1/3 of rents would have protected them here from a default by one.