Forfeited deposit

[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.

[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

[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)

[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