Deposit for a real estate that was not acqries

[toofan1]

My friend put in a $50,000 deposit to acquire a property in NV. The mortgage was not approved. So he lost the deposit. There was no contingency on Earnest's money! How does he reflect the loss of deposit and plus appraisal fee on this property on his tax returns? Schedule E? He has been actively involved in Real estate investment in 2020 and acquired 10 properties. So real estate activities are active income for him, not a passive one.

[Critter-3]

Your friend really needs to talk to a RE attorney so that his contracts cover contingencies in future dealings but for the loss of the earnest money ...

No. You cannot deduct lost earnest money deposits. IRS states this on their website:

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

• Insurance (other than mortgage insurance premiums), including fire and comprehensive coverage, and title 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."

http://www.irs.gov/publications/p530/ar02.html

[Mike9241]

the article cited is from an IRS webpage that is for homeowners

Publication 530 (2020), Tax Information for Homeowners

https://www.irs.gov/publications/p530

if this was investment property an old article arrives at a different conclusion

https://www.washingtonpost.com/archive/realestate/1980/04/26/forfeited-deposit-is-not-deductible/93a...

[toofan1]

 Thank you for your response. My Friens had no contingency that would have allowed him to get the total or part of the deposit back if the mortgage did not approve. Shouldn't that be like any other investment that was done for acquiring a business and the acquisition didn't go through?? Isn't true that the IRS allows that initial investment to be expensed as a business expense???

[toofan1]

 If buying the property is an investment, then the forfeited deposit is tax-deductible as an ordinary business expense. Now the question is: Which schedule on a tax return will reflect this expense? Schedule C or E? My friend has schedule C for his consulting business and his Real Estate investments are treated as trade businesses.

[Carl]

Generally, (I stress *GENERALLY*) if one is not "in the business" of real estate, and/or a real estate professional, the deposit money is just lost and there's no deduction.

For someone who is in the business of flipping houses for example, they report their business income/expenses on SCH C. In that case, the lost deposit may be deductible - provided other conditions are met of course.

For someone who is looking to buy rental property, yet they are not "in the business" of dealing with rental property (i.e.; investment property is not their primary source of income), that commonly gets reported on SCH E. There is no deduction of a lost deposit if they fail to acquire the property.

[toofan1]

Thank you so much for the quick reply. My friend that is also a relative, has bought 10 properties and is involved actively in the Real Estate investmet. Since he  has been able to switch the passive losses to active upon acquisition and involvement in real estate, and elected section Section 469(c)(7)(A, it was determined that he can use the forfeited deposit as a business expense. But schedule E on TurboTax has no place to show this. What section or line of schedule E will reflect that? Other expense? TurboTax will not allow it if you don't have a purchase price for a property. 

[Critter-3]

@toofan1   Please stop relying on a nameless faceless public internet forum for answers to what is a complicated situation and could have many different answers depending on the particulars of the questions.  PLEASE seek local professional assistance on what may also be a legal question.   What your relative does may not apply to your situation  so before you do any other risky investments you need to be educated on all the possible outcomes and the income tax implications. 

[M-MTax]

@toofan1 What section or line of schedule E will reflect that?

There is no section or line on SCH E to reflect that.......it doesn't exist and someone misspoke. For an investor who by definition is not in the RE business......like flipping or building houses......that forfeited deposit is not deductible because the deduction was eliminated by the tax reform act a few years ago. Before that you could write that off as a miscellaneous deduction subject to a 2% AGI floor on SCH A but those deductions were wiped out by congress.