A married couple put up for sale their primary residence. They received an offer and the buyer signed a contract. The contract called for a nonrefundable deposit of $250,000. Eventually, the buyer walked away from the sale so the sellers kept the deposit.
Is the $250K a capital gain? Ordinary income? When is it recoginized? Does the $250K just lower the cost basis?
Thanks. Gary
Is the $250K a capital gain? Ordinary income? When is it recoginized? Does the $250K just lower the cost basis? =================== Ordinary income. No capital treatment because the capital asset wasn't actually sold.
It's not the same as an option in the securities markets, which can get capital treatment.
It goes on 1040 Line 21.
Here's the court citations from RIA:
Binns, Josephine v. U.S., (1967, CA6) 20 AFTR 2d 5715 , 385 F2d 159 ,
67-2 USTC ¶9720 ; Smith, Harold S., (1968) 50 TC 273 , affd(1969, CA9) 24 AFTR 2d 69-6020 , 418 F2d 573 , 70-1 USTC ¶9110 ; Mittleman, Meyer, (1971) 56 TC 171 , affd(1972, CA3) 30 AFTR 2d 72-5574 , 464 F2d 1393 , 72-2 USTC ¶9679 ; Greenleaf, Aaron, (1950) PH TCM ¶50275 , 9 CCH TCM 1024 ; Boatman, Ralph, (1959) 32 TC 1188 ; Mechanic, Morris, (1960) TC Memo 1960-126 , PH TCM ¶60126 , 19 CCH TCM 667 ; Melone, Gerald, (1966) 45 TC 501 ; Handelman, Philip v. Com., (1975, CA2) 35 AFTR 2d 75-637 , 509 F2d 1067 , 75-1 USTC ¶9208 , revg(1973) TC Memo 1973-57 , PH TCM ¶73057 , 32 CCH TCM 249 ; Ailes, Milton, (1983) TC Memo 1983-388 , PH TCM ¶83388 , 46 CCH TCM 648
Suppose the price was $2.5 million. How does this situation differ from selling an option, price $250,000, to buy the house for $2.25 million? The option expired worthless rather than be exercised.
Seth
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