Money lost in real estate investment

[EaglesFan]

What is the name of your state (only U.S. law)? Virginia

About three years ago I entered into a real estate investment with a private investor. I put up $30K toward the cost of buying and flipping a home under the investor's LLC. My involvement with the project was very minimal...I was basically a silent partner and entrusted this individual to handle the details. I would check in periodically for status updates. She was unable to sell the house initially, so she ended up entering into a one-year rent-to-own contract with a tenant. Somewhere along the way there was a mold problem, and there is apparently a lawsuit pending against my co-investor related to that and other issues which I won't even go into. Consequently she is filing for bankruptcy, but she is offering me $1,100, which she claims is all she has. In exchange for this, I would sign a release.

My question is, should I take her offer and walk away from this nightmare, or is there any way I can recoup more of my initial investment? I don't have any reason to suspect she has been dishonest. Would this be a tax write-off, and if so, what kind of documentation might I need?

 

[LdiJ]

What is the name of your state (only U.S. law)? Virginia

About three years ago I entered into a real estate investment with a private investor. I put up $30K toward the cost of buying and flipping a home under the investor's LLC. My involvement with the project was very minimal...I was basically a silent partner and entrusted this individual to handle the details. I would check in periodically for status updates. She was unable to sell the house initially, so she ended up entering into a one-year rent-to-own contract with a tenant. Somewhere along the way there was a mold problem, and there is apparently a lawsuit pending against my co-investor related to that and other issues which I won't even go into. Consequently she is filing for bankruptcy, but she is offering me $1,100, which she claims is all she has. In exchange for this, I would sign a release.

My question is, should I take her offer and walk away from this nightmare, or is there any way I can recoup more of my initial investment? I don't have any reason to suspect she has been dishonest. Would this be a tax write-off, and if so, what kind of documentation might I need?

If she does file bankruptcy then yes, you can write off the investment. If it was a pure investment then it would be a Schedule D capital loss which you can take against other capital gains or 3000.00 per year if you have no capital gains for it to go against, and it will carry forward until it is used up.

If it was more of a loan, then it would be a Schedule A Other Expense deduction for bad debt.

I would recommend that you use a tax professional for that return, even if you do not normally do so.

 

[EaglesFan]

If she does file bankruptcy then yes, you can write off the investment. If it was a pure investment then it would be a Schedule D capital loss which you can take against other capital gains or 3000.00 per year if you have no capital gains for it to go against, and it will carry forward until it is used up.

If it was more of a loan, then it would be a Schedule A Other Expense deduction for bad debt.

I would recommend that you use a tax professional for that return, even if you do not normally do so.

Thanks for the reply. So no way to recoup any of the money from her LLC? Obviously she doesn't have any if she is filing for bankruptcy, and even if she did, I would have to get in line behind her other creditors. Is that about right?

 

[AdjunctFL]

If it was more of a loan, then it would be a Schedule A Other Expense deduction for bad debt.

A non-business bad debt is treated as a short term capital loss in the year it becomes totally worthless. It is not a Schedule A deduction. If this is a bad debt, it would be non-business unless the individual is in the business of lending money or it is closely related to a trade or business that the lender is involved in.

 

[Zigner]

Investments come with risk. There never was a guarantee that you would get your initial investment back...