How to report loss on forefeitment of deposit?

Question

Hello,

I contracted to buy a real estate property (residential property that I planned to rent out) and paid $10,000 as deposit. I had 6 months to close the escrow. During that time, the prices dropped significantly, and I decided not to close the escrow. So, I lost my deposit.

Question: What type of loss is it for income tax purpose? Ordinary loss or capital loss? Where should I report it on Form 1040? And what about the attorney fees that I incurred for this transaction?

Thanks in advance

Answer 1

It seems to me that you're in the rental business, so that $10,000, attorney's fees, and miscellaneous expenses associated _with that property_ go on the Schedule E for that property.

Unless you're a dealer, that total should be deductible as a passive loss, subject to the $25,000 limit.  

Answer 2

Neither.  It isn't a loss for tax purposes.  

Forfeiting it was your choice.  That AND the attorney fee - you get no tax deduction for either.

Answer 3

Capital Loss on Schedule D subject to ordinary capital loss limitation rules.

Answer 4

Schedule E, but be prepared to prove that you really did intend to rent the property out.  A loss on a rental property is deductible.  A loss on a personal use property isn't.  The IRS will ask ask you to show objectively how this wasn't personal-use property.

If you have other rental properties (or a history of buying rental properties), it's easier to make your case.  If this is a timeshare or something similar, dream on.  

Answer 5

You cannot deduct forfeited deposits or earnest money. See link.