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This investor lost his down payment in rehab project in Chicago, IL due to builder fraud. Builder filed for bankruptcy and hiding his asse

This investor lost his down payment in rehab project in Chicago, IL due to builder fraud. Builder filed for bankruptcy and hiding his assets. Wondering investor loss could be recovered from IRS under 'Fraud and/or Theft Loss' or ‘Bad Debt’ option of IRS.
Section 165 Theft Loss
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Kathryn Morgan
If this taxpayer is in the business of investing in construction projects like this then I would say this goes in the business return as a bad debt. Mir this was just a one time type investment and he had no active participation then I would go with a capital loss on Sch D, of course that means only $3k a year after offset of other losses, but, if he did it as a personal bad debt (which he sounds like he qualifies for) it would still be limited under capital loss rules. Unless something criminal come up,,since there has been both civil court ruling, bankruptcy court rulings and no further recourse, I think he is stuck.
Reply 175 weeks ago
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Tax Professional Answers

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Kathryn Morgan
If the client was included in the bankruptcy as a debtor and the case was settled with your client getting nothing then it is a bad debt. If there is sme kind of criminal or civil case going on about bankruptcy fraud you might get a theft loss on it. It will depend on the details. Can you expand?
Leave a Comment 175 weeks ago

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Kathryn Morgan
If this taxpayer is in the business of investing in construction projects like this then I would say this goes in the business return as a bad debt. Mir this was just a one time type investment and he had no active participation then I would go with a capital loss on Sch D, of course that means only $3k a year after offset of other losses, but, if he did it as a personal bad debt (which he sounds like he qualifies for) it would still be limited under capital loss rules. Unless something criminal come up,,since there has been both civil court ruling, bankruptcy court rulings and no further recourse, I think he is stuck.
Reply 175 weeks ago

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