Earnest money released to me, but closing is next year...

[PhilJohnson]

I am selling my house to a developer and after a lengthy feasibility period the earnest money ($37,500) will be released to me directly.   The closing date is 12 months from now.  Will I have to report this as income and pay tax on it for 2019 or can i defer it until the sale is either fully closed in 2020?....or the buyer backs out (in which case i keep the money)

Thanks.

[Hi Palms · Accepted solution]

ask if you're going to get a 1099S....if so you need to report it.....either way it's like an option and should be reported when the sale closes....if no closing then report as other income.

[Carl]

Just my two cents here, as I haven't taken the time to look this up for this "specific" situation.

But basically, the money becomes reportable income as of the date *you* have direct control of it. So if the money has been released to you and you do "in fact" have full control of it (meaning you can spend it on anything you like as of the release date) then it's reportable income on your 2019 tax return.

So if someone can cite a specific IRS rule on this on the irs.gov website, I would fully expect the money is reportable income on your 2019 tax return.

[Hi Palms]

An earnest money deposit, received on the execution of a sales contract, is not income until the taxpayer acquires an unconditional right to retain the deposit. Bourne v. Commissioner, 62 F.2d 648, 649 (4th Cir. 1933), affg. 23 B.T.A. 1287 (1931). If the sale is consummated, it fixes the seller's right to retain the deposit, and the earnest money is included as part of the sales proceeds. Kang v. Commissioner, T.C. Memo. 1993-601; Kellstedt v. Commissioner, T.C. Memo. 1986-435. If the sale is not consummated, the sales contract fixes the seller's right to retain the deposit, and the deposit is included in income at the time that the contract fixes the seller's right to retain the deposit. Baird v. United States, 65 F.2d 911, 912 (5th Cir. 1933). Because earnest money is in the nature of a payment for an option, it is included in the seller's ordinary income when forfeited to him. Sec. 1234; Elrod v. Commissioner, 87 T.C. 1046, 1068-1069 (1986); see Kang v. Commissioner, supra (taxpayers' rights to earnest money were not fixed before they refunded a portion of it; amount they kept was included in ordinary income in year they made refund, not year they received earnest money).

[Rosie25]

Thank you for this explanation. If I don’t report $20,000 in earnest money to the IRS in the year received which was 2024,  with the intention of waiting to report it when the property closes in 2025, do I need to explain the $20K earnest money that was deposited into my bank account in 2024 to the IRS in some fashion? if so, how do I do that if I’m not reporting the earnest money on my 2024 return? It‘s my understanding that banks must report deposits of $10000 or more to the “feds.”   Whoever the “feds” are in this case and is this a concern?

thank you

[Hi Palms]

You don't need to report it until the money becomes irrevocably yours and that time would not be until the sale closes or the buyer defaults and forfeits the earnest money to you.

[Rosie25]

Thank you!

[Vanessa A]

What is your roll in this transaction?  Are you a broker or are you an individual?  

Although you may not need to include the earnest money on your 2024 return, you still may need to file form 8300 to report the payment of more than $10,000 in one transaction.
 

Form 8300 and reporting cash payments of over $10,000

@Rosie25 

[Hi Palms]

IF you are receiving CASH payments which do NOT include:

• Personal checks drawn on the account of the writer.
• A cashier's check, bank draft, traveler's check or money order with a face value of more than $10,000.
• Any transmittal of funds from a financial institution.  A financial institution includes a bank or a money services business, i.e., money transmitter.

[Rosie25]

Individual

[Rosie25]

Individual and the funds received were in check form

[RobertB4444]

In that case you're good to go until either the sale goes through or the deposit is forfeited and you get told you can keep it.

@Rosie25