Capital Loss

[TAX]

Client, owns personal residence

He decided to buy town house in 2005 (second house as an investment). Gave deposit but deal did not go through.

So he lost $5,000 in late 2005. He tried to get it back in 2005 & 2006. Can he deduct loss on 2007 return.

Can this be deducted as capital loss?

[LMathey]

If deal did not go thru because he could not get financing, most contracts read that the deposit is non-refundable. This is to keep people from tying up a property who have no chance of obtaining financing while the seller loses other potential buyers. So he will not get a refund.

Not sure how to treat the money he lost.

[Grumpy]

I think you need to amend the 2005 return and report it as a capital loss, based on this:

Sec. 1234A. Gains or losses from certain terminations
Gain or loss attributable to the cancellation, lapse, expiration, or other termination of - (1) a right or obligation (other than a securities futures contract, as defined in section 1234B) with respect to property which is (or on acquisition would be) a capital asset in the hands of the taxpayer, or (2) a section 1256 contract (as defined in section 1256) not described in paragraph (1) which is a capital asset in the hands of the taxpayer, shall be treated as gain or loss from the sale of a capital asset. The preceding sentence shall not apply to the retirement of any debt instrument (whether or not through a trust or other participation arrangement).

[TAX]

I think you need to amend the 2005 return and report it as a capital loss, based on this:

Sec. 1234A. Gains or losses from certain terminations
Gain or loss attributable to the cancellation, lapse, expiration, or other termination of - (1) a right or obligation (other than a securities futures contract, as defined in section 1234B) with respect to property which is (or on acquisition would be) a capital asset in the hands of the taxpayer, or (2) a section 1256 contract (as defined in section 1256) not described in paragraph (1) which is a capital asset in the hands of the taxpayer, shall be treated as gain or loss from the sale of a capital asset. The preceding sentence shall not apply to the retirement of any debt instrument (whether or not through a trust or other participation arrangement).

Thanks but TP tried in late 2005 and 2006 but did not get it back. Can't I take a position that in 2007 loss is confirmed. Isn't that one has to be 100% sure about loss and try everything before assuming that he will not get money.

[Grumpy]

If you can confirm that the loss was incurred in 2007 - go for it.

[FEDUKE404]

Burden of proof here?

Would someone please explain to me the "fine line" issue here as to how the taxpayer establishes the intent to use the new house as a "capital asset," as apparently that is the crux of the matter.

I assume that for a personal residence the loss would not be deductible.

I assume that for a flat-out business rental (let's say an office building?) the loss would be deductible.

But a mere "second house"? It seems this might be a minefield, as proving intent would apparently be an issue.

Thanks for any thoughts or explanations, as I had a client raising a stink over a deposit loss on a new (replacement) home when for a myriad of reasons they backed out of the deal and then wanted to claim their "loss." They still are upset that I told them they could not.

FE