Is this to be claimed as income?

Yes. In effect, your son sold his property, but then permitted the buyer to withdraw from the contract in return for a $15,000 fee. That is income and should be reported. I would suggest it might be classified as "other income" and reported on line 21 of Form 1040. (I'm assuming he isn't in the real estate business.)

Depending on your son's total income, he should either increase his withholding or arrange to make estimated tax payments to offset the additional tax he will owe for 2008. Under the circumstances, it might be worth his while to seek guidance from a tax advisor.

Bill

Couldn't it be thrown in with what he eventually sells his house for, paying capital gains on it as appropriate?

Yes it possibly could, in the event that occurs within the same tax year. Frankly, I was reflecting the dire real estate market conditions

-- which undoubtedly led to the original cancellation event -- and assumed there was enough doubt about a replacement buyer to plan for handling the status quo situation.

Bill

I'm of a different opinion, Bill, since this was a separate transaction which will have occurred well before the (eventual) sale of the house. Doesn't matter that it might be in the same year.

For a client of mine, I would list it as you first said, "other income".

ChEAr$, Harlan Lunsford, EA n LA

I agree with you, Harlan. I think an analogous situation would be writing call options on stock you own. Assuming the call expires unused, do you claim that as income when received, or as part of the sale price in the year when it is eventually sold?

Stu

Neither. If a written call expires worthless, you have a short-term capital gain which belongs to the tax year in which the option expired.

If instead the option is exercised against the stock you own, the option premium is added to the sales proceeds of the stock that was called away from you.

-- Rich Carreiro snipped-for-privacy@rlcarr.com

I believe the concensus is that this payment needs to be claimed as ordinary income. I will pass along this advise. I don't believe the IRS will have the ability to have known of this transaction but I'm sure they will be grateful of his honesty and willingness to declare. That is the way he was brought up. Thank you for your time and inputs.