Write-Off for Failed Rental Property Purchase-Yes!!

August 8th, 2016 at 5:35 PM

This article examines a failed rental property purchase and the related tax consequences.

Tom Jones lives in Philadelphia, PA and travels to Florida to purchase a rental property. He enters into a contract and that includes a nonrefundable deposit to secure the transaction, and spends $1300 on inspection and appraisal fees, and $1500 on travel. Unfortunately, Tom is unable to procure the financing to complete the transaction, and loses the $12K deposit and returns home. In this situation, Mr. Jones has two types of costs to consider–capital acquisition and start-up or business expansion costs.

In reference to the business expansion costs, if Mr. Jones is in the business of renting properties, he may deduct all expenses to expand his business, whether or not he is successful in his attempt. If he has no rental properties, he has no rental business to expand, and his travel and inspection and appraisal fees are not deductible. The rules become a bit more complicated under Revenue Ruling 99-23 for the expenses of an active business owner that the transaction does not materialize; that is another discussion.

The Capital Acquisition costs of $12,000 in earnest money deposit and the $1300 for inspection and appraisal are deductible because Mr. Jones entered into this transaction for profit; and deducts the costs on Form 4797.

The Tax Code requires you to pay tax on your profits, and required the government to grant tax deductions for most of your losses.