Making the most of a capital loss
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 Dear
Tax Talk,
I backed out of a contract on an investment property and lost $15,000.
Can I take a short-term loss and how does this work? Thanks.
-- Mike
Dear Mike,
As the real estate market has come to a bump in the road, a lot of folks are giving up their deposits and are facing similar losses. The general rule is that a loss in a transaction entered into for profit is deductible. If the deposit was lost on a personal residence, then you would not have a deduction. Therefore you would need to be able to demonstrate that the property was intended as investment rather than personal.
In this regard the IRS would look at your current residence as compared to the property you lost the deposit on. Hopefully, you didn't indicate anywhere that the property would be owner-occupied. Once they make the comparison they'll still want to conclude that it was a personal residence, so hopefully you have enough documentation and analysis in your corner to counter their assertions.
If you feel your position is strong enough, then you would claim the lost deposit on your Schedule D. Whether the loss is short-term or long-term depends on the dates you entered into the contract and the date you were released. A long-term loss would be a period longer than one year. Since the loss is a capital loss, your deduction is limited to offsetting capital gains. If your gains are insufficient to offset the loss you can claim the standard $3,000 deduction against other income and carry forward to later tax years any unutilized loss.
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