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Ed Johnson
Ed Johnson, Tax Preparer
Category: Tax
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Experience:  GPHR Cert; U.S. Treasury Tax Advocacy Panel appointee
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Can I write off an earnest money deposit on ...

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Can I write off an earnest money deposit on residential real estate that I forfieted due to the market value dropping and the developer lowering the purchase price on other similar new home sales? The property was going to be purchased as an second home/investment and either sold immediately at closing or rented out. What IRS publication provides instructions for allowing this?
Submitted: 7 years ago.
Category: Tax
Expert:  Ed Johnson replied 7 years ago.

Dear juhzr93,

Unfortunately earnest money is not deductable. This loss is a personal loss and is not deductable.

See this definition of what you cannot deduct from the IRS web site:

Nondeductible payments. You cannot deduct any of the following items.

  • Insurance, including fire and comprehensive coverage, and title and mortgage insurance.

  • Wages you pay for domestic help.

  • Depreciation.

  • The cost of utilities, such as gas, electricity, or water.

  • Most settlement costs. See Settlement or closing costs under Cost as Basis, later, for more information.

  • Forfeited deposits, down payments, or earnest money.

Reference: http://www.irs.gov/publications/p530/ar02.html (middle of th epage)

 

Customer: replied 7 years ago.
Reply to Ed Johnson's Post: I was told by a CPA that because this was investment property and the value declined that I could report it as a capital loss. The sale price is $0 and the basis is the amount of the deposit. Is this not correct? I also found information on the internet which leads me to believe that this can be written off up to $3,000 per year for seven years. I understand that a deposit cannot be written off if it is a primary residence.

http://www.taxalmanac.org/index.php/Discussion:FORFEITED_EARNEST_MONEY_real_estate_deposit_lost
Expert:  Ed Johnson replied 7 years ago.

Dear Juhrzr93,

The list I gave you is taken directly from the IRS website where it discusses what is deducable and what is not.

Your CPA may be correct in that if you have business activities.

For example, if you were purchasing a rental property, but if you had no rents, you would not be able to take the passive losses.

A home is always an investment right. But you stated it was a second home. The IRS specifically says that the earnest money is not deductable.

Now if you tell me that you are a DBA, LLC, S-corp, or are a professional realestate investor, I might give you a different answer. Your CPA seeks to give you a loophole. You can try it, and see what happens. I am aware of business developmet costs being deductable, and that can included the purchase of realestate and commerical buildings and rental apartments and units.

But, second homes, that you want to classify and desigante as investment property to attempt to capitalize lost earnest money....I think that is risky and would send up a red flag. If you are going do that, then you could also say that you could carry over the lost equity and ad to the basis of a finally purchased second home. I mean if it s a true investment property and not a second home, wouldn't is stand to reason to be able to carry forward the expenses as developmental costs. However, this is not the case for second homes, etc.

 

 

Ed Johnson, Tax Preparer
Category: Tax
Satisfied Customers: 10760
Experience: GPHR Cert; U.S. Treasury Tax Advocacy Panel appointee
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