Forfeited deposit

[oceanlovin'ea]

Client received a deposit on land that a man was going to buy. The man backed out of the sale and the deposit was non-refundable.

Is this considered taxable income to my client this year? Schedule D transaction or other income on front page of 1040?

Does this increase his basis in the property?

I read a post from earlier and the circumstances were a little different. I just wanted to clarify the information.

Linda F

[BOB W]

This was discussed a year or 2 ago, I had the same situation. Line 21 income was some peoples choice and other said to decrease basis and not to report it.

I chose not to report it and decrease basis on the next sale. ( No 1099S)

[Gene V]

This is from an article on Real Estate Tax FAQs-- Ronald Cappuccio, JD LLM

Is a Forfeited Deposit Ordinary Income or Capital Gain for Tax Purposes?

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

[Black Bart]

Tough break, Bob

Answer: A seller who retains both the down payment and the property must treat the forfeited amount as ordinary income.

You realize, of course, that it's now our duty to report you to the proper authorities.

P.S. Never mind about that. I just remembered a couple of skeletons I left back there somewhere in the archives closet. Let's just call it even.

[BOB W]

You realize, of course, that it's now our duty to report you to the proper authorities.

P.S. Never mind about that. I just remembered a couple of skeletons I left back there somewhere in the archives closet. Let's just call it even.

It was a small amount and the statute has run or will run shortly.

[Gene V]

Bob W.

Bob, I not saying you were wrong, my writing skills just isn’t up to par as the rest
Of you guys, (34 years in the airline-just didn’t teach me to write.) That’s why its
easier for me to copy and paste article’s. For all I know the attorney could be wrong.

[BOB W]

Gene> the writing is on the screen (copy/paste) and it is probably correct.

When it is someone elses client > it goes on line 21. When it is my client> it is basis.

When I first research this issue I found it both ways so I split the difference> basis adjustment.

[cpadan]

Per RIA:

A seller who retains both the down payment and the property must treat the forfeited amount as ordinary income. 5


--------------------------------------------------------------------------------
5

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

[S T]

Wonder

Isnt' it income to the receipient (seller) and basis adjustment somewhere to the person (buyer) that didn't go through with the transaction.

Could this be the confusion?

Sandy

[cpadan]

Isnt' it income to the receipient (seller) and basis adjustment somewhere to the person (buyer) that didn't go through with the transaction.

Could this be the confusion?

Sandy

Sandy I don't see where there would be a basis adjustment on either side. The buyer (potential) never received title to the property so he never had a basis to begin with.
Dan

[S T]

Pub 530 is all that I find so far

According to Pub 530, it simply states that in the case of personal residence, the buyer can not deduct the forfeited deposit. However, something way, way back in my mind seems that forfeited deposit could be added to basis of a subsequent concluded transaction. And this might only be for personal residence, not for investment property. I can't find the info on forfeited deposit for investment purchase.

No question that the seller that receives the forfeited deposit and failed transaction needs to report income. I have read that it could be a Schedule D since it is related to a Capital Asset, some posts will say "basis" adjustment"

So now I am confused!

Can anyone give a clear and consie explanation on treatment of forfeited deposit,

1) for personal residence
2) for investment property

Glad you are all here

Sandy

[oceanlovin'ea]

Answer??

I just wanted to move this back up to the top so Sandy's questions could get answered. I would like to know the answer too.

Linda F

[oceanlovin'ea]

Moving back up

Just moving this post back up to the top.

On investment property would the forfeited deposit go on Schedule D or line 21?

Thanks

Linda F

[ProbateGeek]

. . . No question that the seller that receives the forfeited deposit and failed transaction needs to report income. I have read that it could be a Schedule D since it is related to a Capital Asset, some posts will say "basis" adjustment"

. . . Can anyone give a clear and consie explanation on treatment of forfeited deposit . .

Sandy

First time poster, here.

Sandy,

I cannot offer a complete explanation (concise or not, and certainly not clear!), as that's a pretty tall order for a probate attorney. I was consulted by an estate's CPA to answer the question of income tax treatment of a $50,000 purchase deposit forfeited to estate as seller. Here's what I found yesterday:

"If the purchaser defaults, and thus the sale is not closed, the purchaser's loss of the deposit does not result from a sale or an exchange. Accordingly, the forfeiture of the deposit will result in an ordinary loss to the purchase and ordinary income to the seller." (from Capital Gains and Losses: the Federal Income Tax Consequences of Property Transactions, Student Edition, by Earl M. Colson, 1975, American Law Institute, p. 149).

The Harold S. Smith case, 50 T.C. 273 (1968), referenced in a prior response, reasoned this is so because "[t]he seller in such cases has the same capital assets as before and has the deposited amount as well. If the taxpayer is to be entitled to treat the amount retained as long-term capital gain there must be a sale or exchange, and . . . where the contract of sale was never carried out the transaction left him with the property plus the deposited fund."

The estate's CPA will be highly disappointed, but there it is.

Terry
Nothing is more admirable than the fortitude with which millionaires tolerate the disadvantages of their wealth. Nero Wolfe in The Red Box, by Rex Stout (Farrar & Rinehart, Inc., 1937).

[S T]

Thank you

Terry nice to have you on the Board.

Thank you for the information on forfeited deposits.

Sandy