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.
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)
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.