Forfeited deposit

[Zee]

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).

Hmmm....would that ordinary loss to the purchaser be deductible? Let's assume the buyer was buying equipment for their business, or a rental property. How can they have a deductible loss on property they never owned? Or, is it considered an investment loss? If so, what about a personal residence?

[oceanlovin'ea]

Perfect timing

This is perfect timing as the client I had the question regarding just brought his tax papers in this week.

Since this is ordinary income and not a schedule D transaction, I guess we can just put it on line 21.

Linda F

[ProbateGeek]

Hmmm....would that ordinary loss to the purchaser be deductible? Let's assume the buyer was buying equipment for their business, or a rental property. How can they have a deductible loss on property they never owned? Or, is it considered an investment loss? If so, what about a personal residence?

I can only think that the loss would not be deductible to the average taxpayer as purchaser, if the transaction was, say, the purchase of a personal residence. In our case, the would-be buyer was a real estate developer (okay, maybe not a good one...), and so should be able to take the loss.

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).

[FEDUKE404]

Isn't it plain vanilla ordinary income?

WOW - I thought this was a simple question until I started reading the answers.

My spin is the recipient of the income has ordinary income, pure and simple. (I'll let others decide if a business could deduct the same payment.)

In the recent past I had a client who received $50k each of several years running as an option to buy his property. Each year the option was unexercised, and each year the income was reported as ordinary income. Eventually they DID excercise the option and bought the property, and all funds (for that year only) went into the total sales prices, Sch D, etc.

I hope I have not been having another Rip Van Winkle moment?

FE