Show forfeited deposit on property as capital loss while tax filing

[adityabadve]

We paid 5% deposit to the builder to buy a property . Our house possession is in couple of months. But we are rethinking our decision due to market shift. If we back out now from the house, will we be able to report forfeited deposit as capital loss while filing taxes? I see that only rental property deposit loss can be claimed, what can we do to show that the property the we put money on was intended for the rental use?

[SweetieJean]

Well, was it really intended for rental use at the time of the deposit?  What did you tell potential lenders, the municipality, etc?

[adityabadve]

We were planning to rent our existing house. What do I need in order to show that this was potential rental property? Preapproval from lender for rental investment?

[SweetieJean]

"Renting" refers to the home being built, not your existing  "Potential" doesn't cut it. Sorry, but you are out of luck.

[SweetieJean]

Forfeited deposits on the purchase of your personal residence are not tax deductible. 

[SweetieJean]

According to IRS publication 530, any deposits forfeited during a real estate transaction are nondeductible.

"Nondeductible payments.
You can’t deduct any of the following items.
Insurance, including fire and comprehensive coverage, mortgage insurance, 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."

[Anonymous]

while not a tax issue,  talk to a lawyer about what it could really cost you if you signed a contract for purchase and then back out.   you might be surprised

[adityabadve]

Talked to the builder. If I walk out, I would be loosing all the deposit. I can ask builder to change the property to rental by giving him hardship letter (my wife's job change). I am considering option, If he agrees to let me put the property as rental, and then I back out, will I be able to write it off in my taxes.

[TaxGuyBill]

No.  When you paid the money, it was not for a rental property.

[adityabadve]

I see. Thanks!

[SweetieJean]

So was it "rethinking our decision due to market shift" or "wife's job change"?  Sorry, but neither will do.
As @TaxPro+40 suggested, talk to a lawyer. Ask them about "Specific Performance."