Sch D/4797 expense or other?

[drc34718]

I have a question for the forum from a fellow CPA for which I do not know the answer: I am reiterating the facts as I understand them and would like to see if anyone has a reasonable response..

A married couple put down $1000 earnest money with a developer to purchase a house. In addition, it appears the wife paid developer $65,000 for custom changes to the house during construction. Prior to completion, couple backed out of the contract. AGI for the couple is estimated at $800K to $1M for 2007. Couple never took title or possession of the property per se, but want to write off the $66,000. Since no underlying asset owned here, is this potentially a Sch D loss limited to $3K per year? I doubt it could be treated as 4797 since there was nver any indication of investment purposes, etc. Outside of these two options, I'm not sure where to go, if any at all.. It may even be a situation in that there is not a tax loss available since no asset owned, no investment purposes, just a cost of changing your mind which can be costly..

Thanks for any comments.

D. Cooper

[Snaggletoof]

Purpose of the House

Let's start with "Why were they building the house?" Was it to live in?

[Roland Slugg]

Likely a personal, N'D loss

Was the house going to be the couple's new personal residence (or a second home)? If so, then the loss is a personal loss ... no tax deduction. However, if the house was going to be a rental, the loss may be deductible on F-4797. If the T/Ps want to make that assertion, they should be able to prove its intended purpose, and that may not be easy, especially if the house was going to be an expensive, custom home, which sounds like the case. The vast majority of rental houses serve the low to middle sectors of the market. High-end rentals are relatively uncommon, especially for a newly build house.

[ChEAr$]

the best intentions

Was the house going to be the couple's new personal residence (or a second home)? If so, then the loss is a personal loss ... no tax deduction. However, if the house was going to be a rental, the loss may be deductible on F-4797. If the T/Ps want to make that assertion, they should be able to prove its intended purpose, and that may not be easy, especially if the house was going to be an expensive, custom home, which sounds like the case. The vast majority of rental houses serve the low to middle sectors of the market. High-end rentals are relatively uncommon, especially for a newly build house.

do not (always) control for tax purposes.

Even if intended for rental purposes, it wouldn't be 4797 since never placed in service.
Schedule d at best.

However, from how I read the OP, when he says that wife initiated the changes,
my impression is the house was intended to be a home, family home. After all,
it's the wife who will be in the kitchen and at home most of the time, right?
(grin)

[drc34718]

As I was told, the couple's intent was to purchase the house as a principal residence and not as an investment/rental property..I keep coming back to the conclusion that this is a personal loss and there is no deduction..

I agree with the comment that no 4797 and in my mind, even the Sch D is a real struggle..you never owned anything to lose value since no title to property ever taken.


I thank ya'll for your opinions..

D Cooper

[Kram BergGold]

Maybe basis adjustment

As the house was meant to be a residence no loss is allowed. However, as they never took possesion of the home maybe it can be treated as an increase to the basis of the next home they buy or build.

[joanmcq]

I think that is really stretching it. Personal loss, too bad.