Client hired contractor to build a barn for personal use. It was built incorrectly and fell down. They went through arbitration and contractor was to pay back the amount he received. Contractor has since filed bankruptcy. The amount is sizable. Can anyone think of a way to deduct it?
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The American story. You win a money judgement and the debtor files bankruptcy and you are left with nothing except the cost of litigation. I have been at the receiving end and unfortunately with TCJA changes it can not be deducted for personal use loss. It is not an investment property so do capital loss deduction either. Just a sad ending.Taxes after all are the dues that we pay for the privileges of membership in an organized society. - FDR -
If he had another barn build correctly this time, I would think you could add the cost of the first barn
to the second barn for adjusted base--what do to think???
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Probably not. We have that it was "built incorrectly and fell down." -- is that a casualty loss? "A casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual." What was the identifiable event here? Poor construction is not an event.
I wonder if the construction was properly issued permits by the local authorities, and if so what did they find when they made the final inspection?
"You said it, they'll never know the difference. Come on, we'll paint our way out!" - Moe Howard
"That's enough! When you didn't know what you were talking about, you really had something! [to Curly]" -Moe HowardComment
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If you go bankrupt before you pay the contractor he gets to put a lien on the property. If he goes bankrupt before honoring the contract, his debts are cleared, his reputation is camouflaged by a new business name and you get nothing."Dude, you are correct" Rapid RobertComment
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What about a non-business bad debt?
From Pub 550: "Insolvency of contractor. You can take a bad debt deduction for the amount you deposit with a contractor if the contractor becomes insolvent and you are unable to recover your deposit. If the deposit is for work unrelated to your trade or business, it is a nonbusiness bad debt deduction."
If wasn't a deposit, but contractor was obligated to pay it back by the arbitrator. Thoughts?Comment
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Your client was a money judgement creditor, that never got to collect the judgement. I don't think you can argue that it was a non business bad debt for tax deduction purpose.If wasn't a deposit, but contractor was obligated to pay it back by the arbitrator. Thoughts?Taxes after all are the dues that we pay for the privileges of membership in an organized society. - FDRComment
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Kathy - every event in life doesn't lead to a tax deduction. I think your taxpayer is out of luck.
If you're a fan of the rock group Journey, you will remember the Steve Perry lyrics.
Some will win
Some will lose
Some were born to sing the blues …
And it goes on and on and on and on
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Well, I did have quite a crush on Steve Perry back in the day.... However, he has not aged well.
I did get some more info from client:
"Barn was still in build stage. Original barn quote was $ 98,000.00. Money paid $ 92,950.00. Money paid to rebuild and finish to original specs by another contractor $ 60,000.00. Money awarded by arbitrator 78,000 ( 60,000 money, 18,000 legal fees)"
Since the award was the amount to rebuild, I can't justify trying to classify it as a lost deposit.Comment
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