Can this be claimed as a loss?

Unfortunately this is a personal loss and personal losses are not deductible.

Dick

Technically, your conclusion on deductibility is correct but the reason is not. Certain personal losses are deductible (see casualties and thefts). This loss is not deductible because it is not a loss on investment property but rather a loss on "personal-use" property.

Since when is rental property "personal-use" property?

I concentrated so hard on Dick's response, that I missed the fact it was rental property. That makes the loss deductible.

NOT QUITE. It is personal use property unless and until you rent it. If the OP had written that the down-payment was lost by an LLC setup for real estate rentals or that the financial difficulties were on the part of the prospective tenant, there would be some gray area.

If a deduction were allowed for failed real estate purchases, everyone would claim the real estate was for rental purposes.

I will grant that if the OP has other rental properties, an argument can be made for a business loss - but that was not stated. Such an argument is most likely unavailable to a first time rental property purchaser.

Dick

That could prove rather difficult if, as is typical, the purchaser applied for a mortgage and stated that it would be owner-occupied. If OP has similar evidence (e.g. applied for a mortgage as a rental property), wouldn't that suffice?

Seth

Seems to me that it would be a matter of proof. If the taxpayer can establish to the satisfaction of a court that the payment was to purchase investment property, he's probably ok taking the deduction. On the other hand if he made a loan application saying it was for personal use, that would pretty much end the matter.

Stu

The OP wrote: "I signed an contract to purchase a condo as a rental unit. Due to financial difficulty, I was not able to close it and lost the down payment."

As almost always, it depends on the facts and circumstances. My recollection is that if the buyer is unable to get a mortgage, the earnest money (deposit) is returned to the buyer. Thus, my presumption was that he was arranging financing from investors and lost his deposit when the investors did not come through. This is a common mistake by rental property purchasers.

Dick

It becomes rental property, I believe, when it is made available for rent.

If you are correct, then the OP did not have rental property because he never had it to put up for rent. However, if he was in the rental property business, he probably has an argument for the deduction.

However, I disagree in part with your premise. If someone moved on Oct 31st and put their house up for rent. However, if it was unrented by mid-Feb when they filed their taxes, would they have two months depreciation on their return?

How many months before renting is the rule for deducting expenses rather than capitalizing them? My guess is three months.

Dick

It is not personal use property until such time you rent it. Whether or not there is a deductible loss depends upon intent. If the contract was entered into to buy property that was not intended for personal use, the loss would be deductible. The taxpayer bears the burden of proving that the property was not intended for personal use.

Okay, so it's not rental property until then. Therefore it must be investment property is that was the purpose, hence a capital loss.

ChEAr$, Harlan Lunsford, EA n LA

No certain number of months. All depends on the facts. Just the facts.

Say that one moves out October 1st, takes two months to renovate and get it ready to rent, then on December 1st advertises it ready to rent in a nice suburb (Catonsville) in the Baltimore Sun. Depreciation for one month, Dec, is taken in that tax year.

ChEAr$, Harlan Lunsford, EA n LA

Good! I think that's the best answer. Thanks, Harlan.

Stu

Or, investment-use, if you don't use it personally or in a trade or business.

Rental real estate has always struck me as occupying an imprecisely-defined area between business and investment, it has characteristics of both but isn't exactly either.

There is no "number of months" rule. You have to make the unit available for rent and be seeking a tenant (so, for example, if you are doing a major remodel, it's not available for rent). The longer you go without a paying tenant, the harder it will be to show you were taking reasonable actions to find one.

Let's start with the OP's question, "what schedule or form". He did not buy a rental property, let alone put it into service, so I don't see how Schedule E could be used. It doesn't seem to be a business start-up expense, nor a casualty. If the transaction had succeeded, the down payment would have been part of the depreciable basis (at least, the part allocated to the building, not the land). What about passive activity limitations, I'm not sure if they have any bearing.

If it's pretty clear that this purchase was not intended for use as personal residence but as a rental, I'd put it as a short-term capital loss on Sched. D, whether or not the taxpayer was already a landlord.

-Mark Bole

And we can assume the mortgage interest was not claimed as mortgage interest but as investment interest? That's one of those mistakes that often trips up taxpayers who retroactively bought invetment property instead of personal use property.

Good point, gotta love those "retroactive" tax events!

But maybe those other taxpayers had deductible mortgage interest on a second home and a non-deducible personal loss upon sale? I guess you'd have to run the numbers both ways.

The OP's purchase never completed, so he never had any investment interest expense, which is a good thing since he also had no investment income to offset it against.

-Mark Bole

So far responders have hypothesized this was a personal loss, a business loss, or, in the case of one infamous EA, a investment/capital loss!

I've purchased 4 houses and a condo and have yet to read a contract that did not give me an out if I could not get a mortgage. In fact, in this dismal swamp known as Maryland, they make you qualify for a mortgage before your offer is considered. So I do not understand why the OP's down payment was lost.

We should all agree that facts and circumstances determine the proper tax treatment. When property has multiple uses, upon audit the Service will default to the usage has results in the highest tax obligation and the taxpayer is responsible for establishing any other usage. This is the ageless business taxation problem of demolishing a building to erect a new building and trying to expense the FMV of the old building and the cost of demolition. Many try, few succeed.

If the OP can establish he is in the RE rental biz or that he must have been getting into the biz because this condo did not suit his personal needs, he has an argument worth making. Otherwise it is a personal expense.

As for an investment loss, the auditor will most certainly ask to see his investment portfolio.

Dick

(some snipped here for brevity)

Let it be noted, that nowhere did OP mention anything about not being able to get a mortgage, just "financial difficulties". In fact I think his motives is established, i.e. "to purchase a condo as a rental unit".

ChEAr$, Harlan Lunsford, infamous EA