loss of earnest money deposit from a failed investment real estate property

[Greg RZB]

Hello,

I lost an earnest money deposit (EMD) in a failed real estate transaction. I was trying to buy an investment property (rental house with tenants in it), which I was going to continue to operate as a rental property. I also spent $ on an appraisal and house inspection.

From what I read, the loss of the EMD is a capital loss and can be claimed in Schedule D.  However, I don't see where I can enter this loss in Schedule D. 

1. Can someone guide me through the steps for claiming the loss of my EMD as a deduction?

2. Where in Turbo Tax can I deduct the expense for the appraisal and house inspection?

Thank you

[Mike9241]

in interview/step-by-step mode you'll come to a section for investments 

you either click on add more sales 

no to 1099-b

then check the box everything else 

then you will come to a screen to enter the description and other info

then you can enter the amount it cost you

if you have a version that has forms mode instead you can type in 1099-B

and then click on the 1099-B worksheet

[Greg RZB]

@Mike9241 My version of TurboTax has both step-by-step and forms mode. However, the help instructions below are abbreviated and I am not able to follow.  I am a beginner using the software and I could use more detailed help.  Thanks.  

[ljzielke]

I have a similar question, but instead of the property being purchased by me it was purchased by an LLC, which I am a member of.  Do I still claim this loss on schedule D?

[ThomasM125]

@ljzielke The loss would be reported on the LLC tax return and then reflected on the k-1 schedule that you receive from it.

[CR46]

Who creates 1099 ( loss earnest money amount) to seller in this situation?

[ThomasM125]

The individual or company responsible for administering the closing on the sale of the property would be responsible for filing the 1099-S form, unless another individual was charged with that task in writing ahead of time. You can review the Form 1099-S instructions here:  Form 1099-S   @CR46 

[JW112]

I encountered a similar situation, involving square footage discrepancies, though my lawsuit is still ongoing. Apart from the earnest money and legal expenses, I also incurred costs for engineering services to accurately measure the square footage. I have a few questions:

1. What documentation do I need to demonstrate that the property I plan to purchase is intended for investment purposes if I don't have an LLC?

2. Assuming I might forfeit the earnest money, can I deduct the legal and engineering expenses?

3. If some of these expenses are deductible, should I deduct them in the year they were incurred or wait until the lawsuit is settled?

Thank you so much!

[DianeW777]

This post is updated: It depends, let's address each question.

1. You need to document why you are purchasing the property, your plans for the investment and whether you plan to use it for any personal purposes.  Keep a log of your intent and future plans for the investment. A personal loss is not deductible.
2. If your intention was for investment, and the sale fell through, you could report it as an investment loss.
3. These expenses are not deductible unless you fully lose the purchase/sale fell through of your investment.

@JW112

[Edited: 04/01/2024 | 8:32 AM PST]