Down payment to purchase

[DTS]

Client put down 10% towards the purchase of 2 pre-fab homes he was going to rent out. This totaled $29,000. Company went bankrupt, no one can locate them. Client has lost this down payment.

How do I show this?

Thanks,
Dennis

[OldJack]

That would probably be a non-business bad debt deducted as short-term loss on 1040 Sch-D.

[veritas]

My inclination

see below.

[Gene V]

I’m thinking form 4684 part B (Casualties and Thefts) or Schedule A line 27

[veritas]

I feel a

poll coming on.

[DTS]

Not me!

I feel a headache coming on!

Dennis

[S T]

Why non business bad debt

It could be it be a non business bad debt? T/p in good faith issued a down payment, and did not receive what he purchased. There should be some relief.

If the t/p initiated the down payment and the intent was rentals? Wouldn't it be on the 4797?

Form 4684 could also carry it to form 4797 as business or income producing theft loss? That is if the t/p had established an income producing motive to begin with.

Sandy

[veritas]

Another possibility

is it is not a deductible loss at all. This was not an operating business so no loss there. It really does not fit into casualty loss either.

[Gene V]

A section from J.K. Lasser’s
Fraud by building contractors. A deduction was allowed when a building contractor ran away with a payment he received to build a residence. The would-be homeowner was allowed a theft loss deduction for the difference between the money he advanced to the contractor and the value of the partially competed house. In another case, a theft deduction was allowed for payments to subcontractors. The main contractor had fraudulently claimed that he had paid them before he went bankrupt.

Not exactly like you case, but have some similarities.

[DTS]

Pre-fab

TP was having them built to put on vacant land he owns in AZ. I did find a few options that I feel this may fit into. I was in hopes of getting this on a D as a s/t capital loss, so I could carryforward.

Do any of you think this would be considered "business bad debt" considering its intent was for rental? Just fishing here.

Thanks for the help!
Dennis

[Kram BergGold]

options

First, theft loss. There was no theft. The company went out of business.
Bad debt, there was no loan so this can't be a bad debt.
Investment loss, that's the ticket. Now is it a business loss or a personal loss. I think you have to take the taxpayer at his word that the intent was to rent and claim it as a 4797 business loss. Kind of like an abandonment.

[OldJack]

Bad debt, there was no loan so this can't be a bad debt.

I would think that a deposit on a contract for purchase is a loan until the purchase is complete, therefore, a bad debt if not paid back because of no completion of the contract to purchase.

If it is a business purchase the loss would be deductible as a business bad debt deducted on the business form (Sch-C, Sch-F, 1120, etc). It would not be appropriate to report on form 4797 as there was no sale of business property. If it is not a loss incurred in a business then it would be a non-business bad debt deductible on 1040 Sch-D.

[veritas]

If the taxpayer

has rentals operating prior to the down payment I would go for a business deduction on Sch E.

[veritas]

I would think that a deposit on a contract for purchase is a loan until the purchase is complete, therefore, a bad debt if not paid back because of no completion of the contract to purchase.

If it is a business purchase the loss would be deductible as a business bad debt deducted on the business form (Sch-C, Sch-F, 1120, etc). It would not be appropriate to report on form 4797 as there was no sale of business property. If it is not a loss incurred in a business then it would be a non-business bad debt deductible on 1040 Sch-D.

I agree after thinking about this that the 4797 would be incorrect. But abandonments go on 4797 and that is not a sale.

[OldJack]

I agree after thinking about this that the 4797 would be incorrect. But abandonments go on 4797 and that is not a sale.

True... but an abandonment and a sale are disposals of §1231 property of which the purpose of form 4797. There is no §1231 property disposal with a deposit.