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Columns: Tax Talk
George Saenz, CPA   Expert: George Saenz, CPA
Tax Talk
Limited tax options on a forfeited condo deposit
Tax Talk

Limited tax-break options on a lost deposit

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.
-- VK

Dear VK,
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.

Bankrate.com's corrections policy -- Posted: Sept. 12, 2007
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