LoTax wrote:

- quote -

I understand your logic. But, once again, I think the EXACT
facts of the particular situation would need to be carefully
analyzed. For example, I'm not sure that an "abandonment"
theory would apply if the forfeiture was due to the
taxpayer's failure to perform, etc.

But I agree, it could be an open question with multiple
arguably acceptable tax outcomes.

MTW

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scott s. <75270_3703a[at]csi.xcom> wrote:

- quote -

So it's taxable to the extent it exceeds the seller's
_deductible_ expenses on the transaction? OK, but those
would be deductible anyway.

Seth

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"Stuart A. Bronstein" <spamtrap[at]lexregia.com> wrote in news:1294ln8eppjg378
- quote -

I guess it would depend on the contract language, but
if buyer failed to perform isn't the deposit treated
as liquidated damages in lieu of suing for actual
damages / demanding specific performance?

If that's true wouldn't the deposit be treated like any
other monetary damage award for tax purposes?

scott s.

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Stuart A. Bronstein wrote:
- quote -

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.

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- quote -

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

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MTW wrote:
- quote -

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.

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- quote -

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

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A.G. Kalman wrote:

- quote -

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

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A.G. Kalman wrote:
- quote -

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

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"A.G. Kalman" <glendale202-mtm9[at]yahoo.com> wrote:

- quote -

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

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Harlan Lunsford wrote:
- quote -

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.

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Stuart A. Bronstein wrote:
- quote -

No, because it's not the same property.

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

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Stuart A. Bronstein wrote:
- quote -

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.

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Harlan Lunsford <hlunsford[at]bellsouth.net> wrote:

- quote -

Yeah, but you have to register first.

Stu

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"LoTax" <lotax[at]hotmail.com> wrote:
- quote -

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

Stu

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D. Stussy wrote:
- quote -

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.

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D. Stussy wrote:

- quote -

(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

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A.G. Kalman wrote:
- quote -

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.

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D. Stussy wrote:
- quote -

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.

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D. Stussy wrote:
- quote -

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

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