"Herb Smith" <smithff33[at]aol.com> wrote:
- quote -

I have worked out an agreement with a jeweler to sell her
the gems at her appraised value (yeh, I trust her...) in
return for a note. She would not have to make any payments
on the note, except with proceeds from the gem sales. In
lieu of interest, we would split any proceeds over the
appraised value. (currently she gets 10% of the proceeds)
She would have the right to pay off the note by simply
returning the gems.

Do you think this would pass muster, or is it too contrived?
It is a great deal for her, but it gets me a sale so I can
write off the bad debt.

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<pgattocpa[at]excite.com> wrote:
- quote -

"to 1/3rd", not "by 1/3rd". The collateral is worth $50K.

If he sells it, he gets a capital loss (long-term). If he
uses the proceeds to buy similar jewelry, he can get the
appreciation in the jewelry market (if it happens). If he's
lucky, the capital loss writeoff time value will cover the
bid/ask spread on his transactions. I'm inclined to doubt
that, unless (maybe) if he has a large short-term capital
gain to net against.

Seth

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Herb Smith wrote:

- quote -

Herb - Thanks for the correction. Unbelievably, I re-read
the original post twice before posting my response.

Larry (OP) - Sorry for the confusion.

Note to self - don't respond late at night. <G
Peter C. Gatto, CPA

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pgatto...[at]excite.com wrote:
- quote -

You misread the OPs post. The collateral is now only worth
1/3 of its original "value" ($50,000), resulting in a
$40,000 "paper" loss. There is no gain here.

- quote -

You received $10,000 plus the collateral (now worth only
$50,000) for a $100K loan. That leaves you $40K short of
coming out even.

- quote -

I agree with that.

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Larry wrote:

- quote -

A paper loss, perhaps, but not an actual loss until you sell
the collateral.

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Larry wrote:

- quote -

Perhaps I am missing something, but I don't believe you have
a loss. You lent $100K; the collateral that *was* worth
$150K has lost 1/3 of its value ($50K), so is now worth
$100K when it becomes your lawful property.

The question may be do you now have a $10K gain? That is,
you lent $100K and received $10K so the outstanding balance
was $90K at the time of the default. However, the
collateral is worth $100K. So you have received $110K for a
$100K loan.

Someone else will have to answer that question.

That being said, gem appraisal is very subjective and I
would suspect that you could get *legitimate* appraisals
both above $90K (which you already have) and below $90K.

Peter C. Gatto, CPA

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I lent a company $100,000 in 2000. They put up $150,000 in
gems as collateral. After paying off about $10,000, they
folded; leaving me the collateral. Sadly, the gems have
dropped to 1/3rd of their 2000 value; so I am effectively
left with a $40,000 loss.

My jeweler says I would be crazy to dump them now; we are at
the bottom of a cycle and they will regain their value in a
few years.

Is there any way I can take my $40,000 loss now and pay
capital gains if the gems really do go up and are sold?
Maybe sell them to my wife for current value (obviously a
bad idea, since it would involve sales tax, but something
along those lines)?

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