Lost deposit on proposed rental purchase

Taxpayer put 10,000 down on a rental property. Financing fell through and he eventually lost his deposit. Misc subject to 2% on Sch A?? Anyone have any ideas?

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Reply to
LLTS
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Not deductible at all. Had the transaction gone through, it would have been a capitalized amount. As no asset was actually acquired, there will be no deduction upon disposition either (nothing to dispose).

Reply to
D. Stussy

Since the attempted purchase was for business purposes, I'd say it should be deductible. Perhaps it could be considered an option that expired, yielding a short-term capital loss. Seth

Reply to
Seth Breidbart

Here was a transaction entered into with a profit motive. And as such, he has a capital loss. Don't you think? sure wasn't a personal loss.

ChEAr$, Harlan Lunsford, EA n LA

Reply to
Harlan Lunsford

Why isn't this an expense incurred to produce income that must be included in gross income? Sounds like a Line 22 Schedule A deduction to me. It was rental property not a personal residence.

Reply to
A.G. Kalman

If you feel that you can make that argument (and deduct it pursuant to Section 212 - production of income), go ahead. However, I note that this was an amount expended for the acquisiton of an asset (that was not actually required), and that requires capitalization - but as there's nothing to capitalize the expenditure into, there's no provision under which it would be deductible. As for Schedule A, line 22, I must disagree. As the original question claims a connection to rental property AND as capital asset transactions (sales) both are "above the line" type transactions, Schedule A is the wrong place for it. An aggressive approach would place it onto Schedule E, but I bet that Schedule D (with the $3k capital loss limit) would be considered by the IRS upon audit if outright disallowance isn't taken as their position.

Reply to
D. Stussy

(snipped)

The moment the deposit on the property is made, capitalization de facto occurs. And that is what qualifies it for capital loss deduction when the deposit is not used and thus results in an exchange, zero being the proceeds. I'd take the capital loss in a Noo Yawk minute. (I think that's the expression they use.)

ChEAr$, Harlan Lunsford, EA n LA

Reply to
Harlan Lunsford

I am absolutely sure there's a better answer to this often-encountered situation than "maybe, maybe not." I'm just not in a position right now to ferret it out.

Reply to
LoTax

Yeah, but you have to register first.

Stu

Reply to
Stuart A. Bronstein

How about adding it to the basis of the new property the taxpayer eventually does buy? Stu

Reply to
Stuart A. Bronstein

How about I deduct all my food and other personal expenses!

How would that be a capitalizable expense into the property actually acquired? The amount was not expended to acquire it but as an attempt to acquire something else.

Not every transaction is deductible (somehow) under the IRC.

Reply to
D. Stussy

No, because it's not the same property.

ChEAr$, Harlan Lunsford, EA n LA Wednesday June 14th, 06

Reply to
Harlan Lunsford

I have to take issue with this conclusion. This was not a completed sale. This was nothing more than an executory contract. Having failed to comply with the terms of the contract the deposit was lost. There is no de facto capitalization of a deposit on an executory contract. This would seem to imply that the receiver of the deposit would have taxable income! I will stick with my conclusion that the sale not having been completed leaves the potential buyer with an ordinary loss that can be taken on Schedule A subject to the 2% AGI limitation.

Reply to
A.G. Kalman

Why wouldn't the receiver of the deposit have taxable income? When a deposit is made it's basically a part of the investment. For whatever reason the investment became worthless. Stu

Reply to
Stuart A. Bronstein

`

then we DO agree; to disagree.

As for the receiver of the deposit, yes, I think he does have taxable income, short term capital gain probably.

ChEAr$, Harlan Lunsford, EA n LA Thursday June 15th 2006

Reply to
Harlan Lunsford

Pardon me jumping in here late.

I think one would need to carefully research the nature of the "deposit" and specifically ~why~ it was lost. But, in general terms, assuming that the deposit would have been applied as part of a down payment had the transaction succeeded, I would consider it a short term capital loss. I say "capital" on the assumption that the failed transaction would have the same character in this regard as if it had succeeded. (By the same thinking, if the prospective purchaser of the realty was a DEALER, then I'd guess the loss to be "ordinary.") However, I think the larger issue - and the one that the IRS might be more likely to pursue if the loss came up on audit

- is establishing that there was truly a business or investment intent with respect to the transaction. I'm sure the IRS would try to argue that it was "personal" in nature and therefore no loss was allowed. MTW

Reply to
MTW

of course they would have taxable income. It wasn't a gift.

Reply to
123go

Twenty years ago, I researched this very very diligently, and well-motivated, and - as best I can recall - this should be characterized as an *ordinary* loss, and reported on page one of 1040. It's not a *capital* loss since it's neither a sale nor an exchange and it's not susceptible to the artificial capital loss "option" treatment(s) under IRC section 1234 or somewhere around there in the code. I am unable to retrieve the research now, but I would suggest someone might want to look into the abandonment of a partnership interest where there's no proceeds, not even "deemed" proceeds from liabilities, as an analogy. IRS published a ruling accepting the partnership situation as an ordinary loss, and IIRC there's a parallel between these scenarios. In addition, there's no such thing as "short-term section 1231 loss" which is where this - maybe, memory's failing - ends up in an alternative argument. Sorry my archives are in such disarray; I might have been able to pull this up a few years ago.

Reply to
LoTax

Though if he's selling the property and the sale completes (to another buyer) in the same year, could the forfeited deposit be consider part of the sale proceeds (making it long-term)? Seth

Reply to
Seth Breidbart

Maybe I should have been clearer in my reply. At the time of the deposit, we have an executory contract. The receiver of the deposit has no taxable income as there is no completed sale. There is nothing to capitalize on the part of the taxpayer making the deposit. After the default, there is taxable income to the taxpayer that received the deposit and there is a deductible loss to the taxpayer who lost the deposit.

Reply to
A.G. Kalman

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