Stuart A. Bronstein wrote:
- quote -

You are correct about employment contracts. Unfortunately,
this is not an employment contract.

--
Alan
http://taxtopics.net

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Stuart A. Bronstein wrote:
- quote -

You are correct about employment contracts. Unfortunately,
this is not an employment contract.

--
Alan
http://taxtopics.net

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MTW wrote:
- quote -

BINGO! You've hit the nail on the head.

Thus it's ordinary income, line 21.

ChEAr$,
Harlan

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Stuart A. Bronstein wrote:
- quote -

You are correct about employment contracts. Unfortunately,
this is not an employment contract.

--
Alan
http://taxtopics.net

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Rich Carreiro wrote:

- quote -

That is actually a special rule applicable to securities
(only) that allows STGC treatment on a lapse. Otherwise, the
general rule is that gain on a lapse is "ordinary."

There would also be the "fact" question as to whether the
real estate deal was an "option" in the first place. Unless
is was SPECIFICALLY stated as such, I would guess not.
Rather, it is an executory contact with a liquidated damages
provision. Any way you cut it, it just sound "ordinary" from
a tax perspective. <grin
MTW

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Rich Carreiro wrote:

- quote -

That is actually a special rule applicable to securities
(only) that allows STGC treatment on a lapse. Otherwise, the
general rule is that gain on a lapse is "ordinary."

There would also be the "fact" question as to whether the
real estate deal was an "option" in the first place. Unless
is was SPECIFICALLY stated as such, I would guess not.
Rather, it is an executory contact with a liquidated damages
provision. Any way you cut it, it just sound "ordinary" from
a tax perspective. <grin
MTW

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Stuart A. Bronstein wrote:

- quote -

I agree that the flow of logic is not consistent in this
particular case. However, apparently the escrow forfeiture
does not give rise to capital gain income because nothing
(that constitutes a capital asset) was sold or exchanged.

MTW

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Harlan Lunsford <lunstax[at]belllsouth.net> wrote:
- quote -

I like that approach, too.

The only problem is the situation in which we're bumping up
against the $250,000 exclusion. For example, if the
original sale had gone through and the entire proceeds would
have been excluded. But due to the cancellation of the
contract, the next (quick) sale is for a lower amount, so
that the total amount received is the same as it would have
been under the earlier contract.

I think it would be reasonable to treat the payment as
proceeds from the sale, since it really is reimbursement for
proceeds that the seller was not able to obtain under the
circumstances.

Stu

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Rich Carreiro wrote:
- quote -

I like your answer better, since it may give rise to netting
out with gains. But 100% taxable it is.

ChEar$,
Harlan Lunsford, EA n LA

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"A.G. Kalman" <glendale202-taxes[at]yahoo.com> wrote:
- quote -

In other situations damages from breach of contract are
treated the same as proceeds from the contract if it had
been not been breached.

I'm thinking specifically of breaches of employment
contracts. Damages received are treated as employment income
for which withholding is required. At least the last time I
was in that situation that was what happened.

Stu

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MTW wrote:
- quote -

If the seller retains the deposit, the seller has accepted
that amount as liquidated damages for breach of contract.
Sounds like Line 21 income to me.

--
Alan
http://taxtopics.net

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sethb[at]panix.com (Seth Breidbart) writes:

- quote -

I realize that analogies are dangerous in the tax world, but
I'll point out that if you own stock XYZ and write a call
option against it and the option expires worthless or is
otherwise not exercised, the premium you collected when you
wrote the option is a short-term capital gain realized the
day the option expires.

So to the extent this analogy with the original poster's
scenario is valid, it would argue for treating the forfeited
deposit as a short-term cap gain.

--
Rich Carreiro rlcarr[at]animato.arlington.ma.us

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John Baker wrote:

- quote -

Arguably it is ordinary income (not capital gain, not return
of capital) because nothing was actually sold or exchanged.
In other words, it is compensation for the "hassle," not
from the actual disposition of the property.

However, I'd guess that most practitioners would add it to
the sale proceeds, assuming that the property is actually
sold shortly thereafter. The bigger problem would be if the
property wasn't sold until the FOLLOWING year.

MTW

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"Harlan Lunsford" <lunstax[at]belllsouth.net> wrote:
- quote -

What do you think of reducing the basis of the property.

Followed by not reporting any income until the property
sells.

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- quote -

If they now sell the home (presumably at a lower price
because they're in a hurry) couldn't they consider that as
part of the sale proceeds?

Seth

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Harlan Lunsford at lunstax[at]belllsouth.net wrote:

- quote -

I agree that is one way to approach it but couldn't that
also be considered a recovery of selling expenses that adds
to the capital gain on the eventual sale? Just subtract it
from the basis as a return of capital. Since the capital
gain is often exempt from tax on a residence, this would be
tax free. Even if it was taxed, it might only be taxed as
LTCG instead of ordinary income.

All freely provided advice guarantee correct or double your
money back

Frank S. Duke, Jr. CPA
Cincinnati, OH USA

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John Baker wrote:

- quote -

Yes, taxable income. Report same on line 21 of your form
1040.

ChEAr$,
Harlan Lunsford, EA n LA

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We have been selling our house, and had a buyer who signed
the purchase and sale agreement, putting a certain amount in
escrow. Four days before closing they pulled out! We had
already moved.

Bottom line is that we get the escrow as compensation for
the failed sale.

My question is how that should be treated for tax purposes.
Is it taxable as income, or under some other rules?

Thanks in advance

John Baker

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