I lost $15k in earnest money on a mixed use building (owned by business, rented to myself) that fell through. Can I write it off as a capital loss on my Schedule C? How?

[thetintedtide]

This large business purchase was intended to be half art studio on bottom, half residence up top with the residence being rented to my husband and I. We experienced some zoning issues, and ultimately the delays ended up costing us the contract on the house and $15k in earnest money. I know you cannot write off personal lost earnest money, but since it was a member equity injection into our business is it possible to write it off as a capital loss under the business on my Schedule C? If so, what is the best terminology for this and where does it fit in my Turbo Tax form?

[DianeW777]

It depends on whether the money was a down payment, or whether it was money spent in another way that was not refunded. If you're buying business property and you forfeit your earnest deposit, you can write that off as a capital loss, provided the property is all business.  This would be a capital loss entered on Schedule D, not Schedule C.

More clarification would be helpful to give specific guidance.  You would need documentation to prove there was a business intent, and then the details of what the $15,000 was used for.  Determine the amount of business versus personal expense.  

Examples would be market research or location advantage, etc. The terminology will depend again on what you paid for and whether there was a written contingency about whether you would be refunded if the sale did not go through.

Please add updated information here and we can assist.

[thetintedtide]

It was an Earnest Money deposit, which according to our contract was non-refundable after the due diligence period. I’m not sure how to categorize it more specifically but 100% of it was lost as EM. I suppose it wouldn’t have been lost if it had been applied towards the purchase like it was supposed to be… If all had gone as planned it would have been part of the down payment. The contract expiration was outside of our control as the local zoning commission put a stop on our project and ultimately the purchase altogether- that’s why we forfeited the EM.

We saved the money for the down payment in our work account, although much of it was transferred in from personal investment into the business. We treated the money we saved a bit too flexibly perhaps (which we mentally justified because we were going to reside in the house above the studio after purchasing). As a single member LLC there’s never been a definitive, organized separation of finances for me…is this something that would prevent us from claiming the capital loss? 

Despite a slight bit of chaos in the bookkeeping, it was definitely a business purchase and would have been financed solely in my business’s name. I’m not sure what documentation I could use to support this other than maybe our loan application to show intent? 

I think if there is one lesson I learned through all of this it is that entangled work and personal finances are a no-go. Thanks for taking the time to answer and help us get this sorted out!

[DianeW777]

This will be a business loss reported on Form 1040 using Form 4797, Sales of Business Property.  Because the intent was to use half of the building for personal purposes, then you must split the payment and only half will be allowed as a business loss (or the relative square feet ratio- upstairs/down stairs).  You should have some documentation about reasons to move the business there and why you thought it would be good for business.

1. Entry in TurboTax:
   1. To enter the business portion: Other Business Situations > Sale of Business Property >Start or Revisit > Enter your sale.  
   2. The selling price will be zero and the cost basis will be the business portion of your cost 
   3. The date acquired will be the date you paid the money and the date of sale will be the date you no longer had a right to the funds
   4. See the images below for assistance.