Dear Tax Talk:
Two years ago, I entered into a preconstruction
agreement to buy a condo. I meant to rent it out
for a while. As the markets deteriorated, I refused
to close on the condo and lost my $40,000 deposit.
What are the ways I can deduct this loss for tax
purposes? Is it possible to treat this loss as
an ordinary loss and not as a capital gains loss?
Thank you very much for your consideration.
You and a lot of other folks are in the same boat. A few weeks ago I answered a similar question, but with a major difference: That person actually acquired the unit under contract.
In your case, if you had sold the condo or the contract at a profit, you would have been entitled to capital gains treatment. If you acquired the unit and rented it out, or attempted to, you could probably claim ordinary loss treatment on the sale of the unit.
Unfortunately, in your case, the
only treatment on the lost deposit would be a
capital loss. Capital losses can only be offset
against capital gains. If you don't have any capital
gains, you can claim a $3,000 deduction against
other income per year. The difference that cannot
be deducted in the current year is carried forward
into future years to be offset against capital
gains or written off at $3,000 per year.
Because you held the contract for more than one year, the loss would be considered long-term capital loss. Use Schedule D of Form 1040 to report your capital loss.