Real estate deposit forfeited

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Topic Author
pcola_pam
Posts: 28
Joined: Sat Oct 01, 2022 7:36 am

Real estate deposit forfeited

Post by pcola_pam »

I made a deposit of $60,000 for a real property purchase in another state. Due to unforeseen circumstances, I had to cancel the contract and have forfeited my deposit. Can I deduct that on my income tax return, with loss carryovers?
fabdog
Posts: 2540
Joined: Wed Jan 16, 2013 12:59 pm
Location: Williamsburg VA

Re: Real estate deposit forfeited

Post by fabdog »

No. You didn't actually make a purchase, so there's no transaction to take a capital loss against

Sorry that happened

Mike
mhalley
Posts: 10394
Joined: Tue Nov 20, 2007 5:02 am

Re: Real estate deposit forfeited

Post by mhalley »

I came accross an article that stated that if you were purchasing it for a personal home there is no deduction, but if doing so for a rental property there is.
https://support.taxslayer.com/hc/en-us/ ... ase-a-home
If you lost earnest money due to a failed personal home purchase, you cannot claim the loss on your return.

If you lost earnest money due to a failed business purchase of a rental home, you may claim the loss. The loss would be considered a capital loss you would write off on your Schedule D.
You say it was for “property”. Was it for investment purposes?

https://www.washingtonpost.com/archive/ ... c9d0bb1ee/
Forfeited deposits on the purchase of your personal residence are not tax deductible. However, if you were buying the property as an investment, then the forfeited deposit is tax deductible as a business expense.
Contact a tax or real estate attorney.
Topic Author
pcola_pam
Posts: 28
Joined: Sat Oct 01, 2022 7:36 am

Re: Real estate deposit forfeited

Post by pcola_pam »

It would have been personal residence.
toddthebod
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Joined: Wed May 18, 2022 12:42 pm

Re: Real estate deposit forfeited

Post by toddthebod »

That sounds like way more than earnest money. What were the circumstances?
Backtests without cash flows are meaningless. Returns without dividends are lies.
Alfonsia
Posts: 312
Joined: Thu Mar 23, 2017 1:47 pm

Re: Real estate deposit forfeited

Post by Alfonsia »

What are the details? I was under the impression that you rarely eat the whole cost of a lost deposit, whatever reason you have to pull out of residential real estate deposit. Was this new construction? What measures have you tried to get it back? Did you try with an RE lawyer?
Topic Author
pcola_pam
Posts: 28
Joined: Sat Oct 01, 2022 7:36 am

Re: Real estate deposit forfeited

Post by pcola_pam »

I joined as a member of a cohousing community that is under construction. The members of the cohousing LLC are the developers and I had to put 20% down to join. There were many unforseen circumstances, mostly due to covid supply chain shortages & contractor incompetence which led to more than 2 years of delays in completion. Costs increased by 25% & I could no longer afford the purchase.

My contract states in part "...If Buyer wrongfully refuses to close, Seller and Buyer agree that since it is impracticable and extremely difficult to fix the actual damages sustained, the Down Payment shall be forfeited as liquidated damages to Seller.

Cohousing definition: Cohousing is people coming together to build a neighborhood that embodies particular values. These values are generally linked to a shared vision for living in a certain way. More often than not the values are around living in a way that increases connectivity, the spirit of looking out for one another and in an environmentally-conscious way.
heisenberg.
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Joined: Fri Aug 28, 2020 11:46 am

Re: Real estate deposit forfeited

Post by heisenberg. »

That doesn’t sound right to me. If the cost went up significantly that seems like a valid reason to get out of the contract without forfeiting the deposit.

Was a lawyer involved from your end?
chassis
Posts: 2145
Joined: Tue Mar 24, 2020 4:28 pm

Re: Real estate deposit forfeited

Post by chassis »

pcola_pam wrote: Sat Feb 10, 2024 10:25 am I made a deposit of $60,000 for a real property purchase in another state. Due to unforeseen circumstances, I had to cancel the contract and have forfeited my deposit. Can I deduct that on my income tax return, with loss carryovers?
If I were you and because of the size of the deposit, I would call three real estate lawyers in the jurisdiction which governs the agreement under which you made the deposit. Spend 10-15 minutes with each of them on the phone, explaining their potential engagement with you. By doing this at minimum you will learn alot. In the best case scenario you could get a large portion of your deposit back.

You haven't shared the terms of the agreement under which you made the deposit, so everything is speculation at this point.
student
Posts: 10650
Joined: Fri Apr 03, 2015 6:58 am

Re: Real estate deposit forfeited

Post by student »

pcola_pam wrote: Sun Feb 11, 2024 7:47 am I joined as a member of a cohousing community that is under construction. The members of the cohousing LLC are the developers and I had to put 20% down to join. There were many unforseen circumstances, mostly due to covid supply chain shortages & contractor incompetence which led to more than 2 years of delays in completion. Costs increased by 25% & I could no longer afford the purchase.

My contract states in part "...If Buyer wrongfully refuses to close, Seller and Buyer agree that since it is impracticable and extremely difficult to fix the actual damages sustained, the Down Payment shall be forfeited as liquidated damages to Seller.

Cohousing definition: Cohousing is people coming together to build a neighborhood that embodies particular values. These values are generally linked to a shared vision for living in a certain way. More often than not the values are around living in a way that increases connectivity, the spirit of looking out for one another and in an environmentally-conscious way.
The language is so one-sided, if it is delayed for 10 years and cost doubled, you have no recourse except to lose the money. After looking at your statements again, it seems that you are the buyer but also a member of the developers. So all the buyers collectively are also the developers. Is this the reason that the language is so one-sided?
Topic Author
pcola_pam
Posts: 28
Joined: Sat Oct 01, 2022 7:36 am

Re: Real estate deposit forfeited

Post by pcola_pam »

Here are the terms and I did sign a personal guarantee with the Seller (the LLC of which I was a member)

Terms: The current estimated purchase price Buyer shall pay for the Property is three hundred sixteen thousand nine hundred sixty-three dollars ($316,963) payable as follows:
a) Unit Deposit. The sum of $62,980 as Down Payment receipt of which is hereby acknowledged.
b) At Closing, IN CASH OR CERTIFIED FUNDS or loan proceeds, the further sum of $253,571 (subject to the adjustments set forth in this Contract).
c) Construction Costs: Changes in construction/material costs may increase the price of the Property and/or prices of selected Options. Such changes in prices may increase the final purchase price of the Unit to be paid at Closing.

Construction Loan Guarantee: Buyer understands that as a part of the construction loan process to build XXXX, that Buyer may be required to sign and deliver a personal guarantee to either the construction lender or to Seller. Buyer agrees to timely execute and deliver such guarantee upon request.


Because of the costs to complete the project, there is no money to pay former members their deposit. Cohousing is a different beast. We did not have a traditional developer for the project, the developer is the cohousing LLC, of which I was a member.
Topic Author
pcola_pam
Posts: 28
Joined: Sat Oct 01, 2022 7:36 am

Re: Real estate deposit forfeited

Post by pcola_pam »

to student re So all the buyers collectively are also the developers. Is this the reason that the language is so one-sided?
Yes, that is the case.
student
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Joined: Fri Apr 03, 2015 6:58 am

Re: Real estate deposit forfeited

Post by student »

pcola_pam wrote: Sun Feb 11, 2024 8:18 am to student re So all the buyers collectively are also the developers. Is this the reason that the language is so one-sided?
Yes, that is the case.
I now understand why the contract is written this way. Is it possible for you to sell your interest/membership/share to another person?
realclemsongrad
Posts: 285
Joined: Sat May 16, 2020 4:37 pm

Re: Real estate deposit forfeited

Post by realclemsongrad »

This is exactly what I was thinking. Can someone pickup this atleast at a discount??
chassis
Posts: 2145
Joined: Tue Mar 24, 2020 4:28 pm

Re: Real estate deposit forfeited

Post by chassis »

pcola_pam wrote: Sun Feb 11, 2024 8:16 am Here are the terms and I did sign a personal guarantee with the Seller (the LLC of which I was a member)

Terms: The current estimated purchase price Buyer shall pay for the Property is three hundred sixteen thousand nine hundred sixty-three dollars ($316,963) payable as follows:
a) Unit Deposit. The sum of $62,980 as Down Payment receipt of which is hereby acknowledged.
b) At Closing, IN CASH OR CERTIFIED FUNDS or loan proceeds, the further sum of $253,571 (subject to the adjustments set forth in this Contract).
c) Construction Costs: Changes in construction/material costs may increase the price of the Property and/or prices of selected Options. Such changes in prices may increase the final purchase price of the Unit to be paid at Closing.

Construction Loan Guarantee: Buyer understands that as a part of the construction loan process to build XXXX, that Buyer may be required to sign and deliver a personal guarantee to either the construction lender or to Seller. Buyer agrees to timely execute and deliver such guarantee upon request.


Because of the costs to complete the project, there is no money to pay former members their deposit. Cohousing is a different beast. We did not have a traditional developer for the project, the developer is the cohousing LLC, of which I was a member.
Thanks.

Insufficient information. The entire agreement is needed. As is the LLC member agreement.

If I were in your shoes, I would make the three phone calls to prospective lawyers in the appropriate jurisdiction, and engage one of the lawyers for several hours of billing. I would do this without delay. If the LLC becomes insolvent (bankrupt) your chances of recovery plummet. You need to get your demand for repayment (if that is the remedy you seek) on the table as soon as possible.

I am not a lawyer.
Topic Author
pcola_pam
Posts: 28
Joined: Sat Oct 01, 2022 7:36 am

Re: Real estate deposit forfeited

Post by pcola_pam »

What has been suggested to other members who have withdrawn is to go ahead and purchase the property and then sell it, most likely for less than I purchased it for, and then I would recoup some of the down payment. Unfortunately, I do not have the liquid resources to purchase for cash. I would not qualify for a mortgage with a monthly income from SS and a small SPIA. I have investment assets, TIRA & Roth but don't want to liquidate those to make the purchase.

The contractor has sued for breach of contract and the LLC has countersued-court date is August. In the event the LLC wins AND the contractor pays, most of the damages will go toward building amenities that were originally planned. There may be some small amount left to repay a portion of withdrawn members' down payments, but I don't hold out a lot of hope. It's a real mess and I was hoping I could deduct the down payment on my income tax return and have loss carryovers. But because it is residential real estate, that's not possible.

I'll do as you all advise and call several RE attorneys in the state where the project is being built. Thanks for all of your input.
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