AboutJohn Stancil, CPA Expertise I can answer questions on personal income taxes, partnerships, and some corporate income taxes. I can deal with some state tax questions. Limited gift and estate tax questions. I am also familiar with ministerial and church tax reporting issues. I teach tax and accounting at a small church-related college. Sales taxes and property taxes are state and local issues so I am not likely be be able to give you an in depth answer on those types of taxes. I have maintained a part time tax practice for over 30 years. I am a member of the AICPA, National Society of Tax Professionals, and the Institute of Management Accountants.
Experience I hold a doctorate in Accounting, and four professional certifications: CPA, CMA, CFM, and CIA. I passed all certification examinations on the first attempt, and received honorable mention for my scores on the CIA exam. I write a monthly tax column for the local newspaper.
Expert: John Stancil, CPA Date: 7/17/2008 Subject: Non business Bad Debt-Home Improvement
Question My wife and I recently had a pool installed. The pool has poor workmanship and numerous defects. Estimates to repair the pool are $42,000.
We have filed a complaint against the contractor and it looks like we may end up in court. I am currently trying to determine if we should pursue further legal action in hopes to receive a judgement. If we do receive a judgement and it is uncollectible (i.e. contractor files chapter 11), can we write the judgement off as a bad debt? Also, can we write off the legal expenses (~3-4K so far...)?
Answer Steve,
Thanks for your question.
You cannot deduct the legal costs, as they are classified as personal.
If the judgment proves to be uncollectable you can only deduct as a bad debt the amount of basis you had in the judgment. In other words, suppose you paid him $20,000 and you paid another contractor $40,000 to finish the job. The original estimate for the pool was $35,000. You have paid $60,000 for a $35,000 pool. You cannot take the first $35,000 as a bad debt, any amount above $35,000 can be deducted if you cannot collect the judgment.
