Tax Guru – Ker$tetter Letter

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Deducting Forfeited Down Payment

Posted by taxguru on December 30, 2009

Q:

Subject:  Forfeited Earnest Money – Tax Help

Hello Kerry/Tax Guru,

I am an avid follower of your blog for all the tax help – I made a down payment on a condo in FL as part of an investment in Jan of ’06. However due to the slump of the real estate, the value of condo is really down that its worth like 40% of the original value. I hired a lawyer to negotiate with the developer on the price, but the developer recently filed for bankruptcy and it looks like at this stage the earnest money is forfeited.

Is there anyway I can use this as capital gains loss for my ’09 filing – It’s a huge amount (41,500), so it is kind of a big blow on my investments.

Thanks in advance for all your help!

 

A:

It sounds as if you would have a capital loss for the amount of your down payment if you will be receiving no property or claim on property for that money and no part of the down payment in cash as part of the bankruptcy settlement.

You should be working with a professional tax advisor, who can explain the rules regarding deducting an uncollectible debt, especially in regard to the proper timing of that deduction.

If the bankruptcy case is still ongoing and there is a chance of your receiving something back from your down payment, you will have to wait until that is completed before you can claim the loss on Schedule D, which can possibly take several years.

If that kind of uncertainly is part of the equation, it may be possible to lock your loss up as being in 2009 if you were to sell your claim to the down payment to an unrelated party before 1/1/10 for a nominal amount, such as one dollar.  You would then have a valid completed disposition to report on Sch. D.

Again, your own personal tax pro should be able to offer more specific assistance for your situation.

Good luck.

Kerry Kerstetter

 

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