Walking away from deposit on a home... is the loss tax deductible?

What is the name of your state? Florida

Back in November of 2006, I put a $12,700.00 deposit down on a
pre-construction condo. Due to the drop in market prices (plus the
fact that I haven't been able to sell my current residence), I decided
not to go through with the deal and forfeit the deposit to the
builder.

Is the loss of this deposit tax deductible? If so, how is
it categorized?

mkivler said:

What is the name of your state? Florida

Back in November of 2006, I put a $12,700.00 deposit down on a
pre-construction condo. Due to the drop in market prices (plus the
fact that I haven't been able to sell my current residence), I decided
not to go through with the deal and forfeit the deposit to the
builder.

Is the loss of this deposit tax deductible? If so, how is
it categorized?

Click to expand...

I have never had that question come up before....not in over 20 years of doing taxes. However, I am pretty sure that the answer is that its not deductible, but it would be interesting to know if anyone else has a different opinion.

What was the intention of the condo? Personal residence, or for rental/ investment purposes?

Intent categorized the answer.

If the condo was to be a personal residence, then no, forfeit of the deposit is not deductible.

If the condo was to be an investment, then *maybe* the deposit is deductible, but probably not.

Snipes

I actually had to research this issue this year -- in the US & Canada. If you lost the deposit because of a sudden, unanticipated event, you might be able to characterize the event as a theft or casualty loss. An example would be putting down earnest money on a house the "seller" didn't actually own. Since the seller was committing theft by fraud, you'd be able to claim a theft loss, if the earnest money was big enough to exceed 10% of your AGI.

Other than those narrow circumstances, you can't deduct the lost earnest money; you can add it to the basis of the next house you buy.