Forfeited Ernest Money on Real Estate Contract

[vitkus]

Client had Rental Real Estate Property listed for sale and accepted an offier. A couple of days before the scheduled closing the buyer opted out of the contract. The property was subsequently sold to another buyer and the closing did take place in 2006. The original ernest money was sent to the client from the Real Estate Agent who was holding the funds. Is the Ernest money to be reported as part of the sale proceeds, or is it to be reported separately. If reported separately is it ordinary income or is it capital gain? Please forgive the spelling and I should know the answer to this but my brain is starting to become fried.

Thank you

M.E.V. EA

[Grumpy]

Forfeiture of Earnest Money

From: http:/www.taxesq.com/taxinfo/RealEstateTaxFaqs.html

"Question: Client was involved a project that realized $75,000 of income due to the forfeiture of earnest money on a failed land sales transaction. Client kept the deposit when the buyer failed to follow through with the acquisition. The land was long term capital property and not inventory. Is this Long Term Capital Gain or Ordinary Income?

Answer: A seller who retains both the down payment and the property must treat the forfeited amount as ordinary income. -
Binns, Josephine v. U.S., (1967, CA6) 20 AFTR 2d 5715 , 385 F2d 159 , 67-2
USTC ¶9720 ; Smith, Harold S., (1968) 50 TC 273 , affd(1969, CA9) 24 AFTR
2d 69-6020 , 418 F2d 573 , 70-1 USTC ¶9110 ; Mittleman, Meyer, (1971) 56
TC 171 , affd(1972, CA3) 30 AFTR 2d 72-5574 , 464 F2d 1393 , 72-2 USTC
¶9679 ; Greenleaf, Aaron, (1950) PH TCM ¶50275 , 9 CCH TCM 1024 ; Boatman,
Ralph, (1959) 32 TC 1188 ; Mechanic, Morris, (1960) TC Memo 1960-126 , PH
TCM ¶60126 , 19 CCH TCM 667 ; Melone, Gerald, (1966) 45 TC 501 ;
Handelman, Philip v. Com., (1975, CA2) 35 AFTR 2d 75-637 , 509 F2d 1067 ,
75-1 USTC ¶9208 , revg(1973) TC Memo 1973-57 , PH TCM ¶73057 , 32 CCH TCM
249 ; Ailes, Milton, (1983) TC Memo 1983-388 , PH TCM ¶83388 , 46 CCH TCM
648"

[vitkus]

Ernest Money

Thank You

That is wasI thought but just needed some reassurance. I just could not think straight yesterday.


M.E.V. EA