Personal Finances: When a relative reneges on a loan

February 1, 2008

Did you lend your brother a few grand last year-or a few years ago-with the promise that he'll pay you back? Are you assuming you can kiss that money goodbye? Well, don't despair. You may still be able to write off the loan on your tax return.

Did you lend your brother a few grand last year-or a few years ago-with the promise that he'll pay you back? Are you assuming you can kiss that money goodbye? Well, don't despair. You may still be able to write off the loan on your tax return. According to the Federal Tax Course Letter, you'll need to attach a statement to your Schedule D that lists your brother's name as the debtor, why the money was lent, when it was due to be repaid, what you did to try to collect the loan, why the debt's now worthless, and why the deduction is being claimed. If you meet all of these requirements, you can claim a short-term capital loss on Schedule D, which offsets your short-term capital gains dollar for dollar.

For future reference, it's always a good idea to draw up a formal note establishing the terms of the loan.