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I have documents about the payment and an official contract between us.
Yes, you may have a deductible non-business bad debt. It doesn't matter if the contractor is from another country. In order to be deductible, the debt must be completely worthless, meaning that there is no chance of getting any of your deposit back. See IRS Publication 550, page 55 for more information.
Since this involves your personal home, I don't think you have any deductible loss. if it was investment property you were buying, you would have a short-term capital loss (non-business bad debt) reported on schedule D. without other capital gains the maximum you could deduct per year is $3,000.
Thank you for the response.
I forgot to mention that this was indeed for an investment property, intention to rent the units out or sell them for profit is stated on the contract. It is not a "house" but condo units in a would-be new development.
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