Discussion:Where to deduct a forfeited deposit for a rental property

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Discussion Forum Index --> Tax Questions --> Where to deduct a forfeited deposit for a rental property

Fabsroman (talk|edits) said:

27 January 2007
If a person forfeits a deposit on a potential rental property because he does not want to go through with the purchase, on what form and what line would this be deducted, if at all. Assume that he already has several rental properties that he has been renting for several years and he has been filing Schedule E.

Thanks in advance for any help.

Michaelstar (talk|edits) said:

28 January 2007
If this client has been filing Schedule E's - this client is holding out the rentals as rentals - Receiving rents, deducting rental expenses. If he receives a deposit that the tenant now forfeits, it is rental income if not previously reported as income. This is where I may be confused. If he is leasing property that he then subleases for a profit and places a deposit on a property that he decides not to rent - then sublease, I would guess this is a separate rental with no income and a single expense.

Deback (talk|edits) said:

January 28, 2007
Michael - I believe that Fabsroman is asking about a forfeited deposit on the purchase of a new rental property--and not a forfeited deposit from a tenant.

Michaelstar (talk|edits) said:

28 January 2007
Ya, I am a little confused by the question. Just trying to help out just the same.

A forfeited deposit on the purchase of a new rental is a sec 212 expense - schedule A - miscellaneous deduction subject to the 2% floor. Maybe this now covers both posibilities.

Fabsroman (talk|edits) said:

28 January 2007
That is what I was afraid of. The guy doesn't have enough itemized deductions to actually deduct this $500 deposit. I was hoping that there was some way on Schedule E to do it, but such is life. Maybe I can find enough medical deductions to get him to the itemizing point.

Thanks guys.

Lizzit (talk|edits) said:

28 January 2007
It's been a while since I've done one of these. I seem to recall the costs involved in setting up a Sch C business would be allowed on Sch D as lost capital even if the business never opened and never became profitable.

Couldn't this also be a bad debt on Sch D? As in, the costs to investigate and acquire a new profit-making venture which ended up not being viable?

Someone else should research this - I don't have time - but well worth checking into before giving up the ghost.

Death&Taxes (talk|edits) said:

28 January 2007
$500? It's probably not worth your time and effort. Sometimes I tell people who do a lot of investing like this to set up a Corp or LLC, open a bank account and close it if the deal falls through, dissolving the entity and taking the loss as a Sec. 1244 loss if it was a corporation. Usually suggest LLC for real estate and Corp for bueiness venture.

PVVCPA (talk|edits) said:

28 January 2007
Perhaps this would be a Sec. 1231 loss. Report on Form 4797 and deduct as ordinary loss.

I have an individual client that lost a deposit on the purchase/construction of rental property because the developer went BK. I will be deducting as a Business Casualty Loss.

Riley2 (talk|edits) said:

29 January 2007
This is either a Sec. 165(c)(1) loss or a Sec. 165(c)(2) loss. Either way, it is deductible in arriving at adjusted gross income. See Sec. 62(a)(4).

Michaelstar (talk|edits) said:

29 January 2007
Riley2 - then where would you suggest reporting this expense at arriving at AGI?

Deback (talk|edits) said:

January 29, 2007
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