Level 1

Question

Where to enter Earnest Money?

Forum|Forum|3 years ago
February 6, 2023
3 replies
29 views

Buy Sell real estate agreement stated that $10,000 a month would be paid to Seller until Closing or Buyer cancel the agreement. Client(seller) received 150,000.00 of earnest money in 2022. Buyer canceled the contract.

Where would I enter the earnest money received since no property was exchanged?

Thanks guys.

Individual

This topic has been closed for replies.

Camp1040

Level 10

The buyer walked away from 150K? Assuming the money was not refundable I would report the income as breach of contract other Income. You will have to enter the breach of contract verbage. That is my thought.

IRonMaN

Level 15

Do you need fancy verbiage to pick up other income? As long as the $150,000 is reported is the IRS going to complain? 😉

As a side note, I wish I had enough cash lying around to just walk away for $150,000. I would walk away from $1.50, maybe even $15.00, but $150,000? That's rich for my blood 😅

Slava Ukraini!

Camp1040

Level 10

I do need to be more succintt with my explainations, I meant to type in "breach of contract" on line 12 of the other income statement whick should then carry to Schedule 1. I agree the IRS would not care about all the goobly gock an attoney would write into a contract.😉

BobKamman

Level 15

That looks like an option to me. For stock options, the proceeds from an option that is not exercised is either short-term or long-term capital gain, depending on when the option was sold. I don't know about real estate, but if there is a question of whether $150K goes on Schedule D, I would research it thoroughly.

And in what year was the contract canceled?

BobKamman

Level 15

According to the Tax Court in 2018, it depends on whether the real estate was used in a trade or business.

Under Sec. 1234A(1), a taxpayer's gain or loss from the cancellation, lapse, expiration, or other termination of a right or obligation with respect to property will be a capital gain or loss if the property is a capital asset of the taxpayer. Capital assets do not include real property used in a trade or business.

https://www.journalofaccountancy.com/issues/2016/dec/forfeited-deposits-are-ordinary-income.html

Camp1040

Level 10

With a little more info from the OP I believe that @BobKamman will be the winner of the big fluffy teddy bear, or bare, or bar or whatever the definition is.for the most correct answer!

IRonMaN

Level 15

But Bob already is our big fluffy teddy bear.😜

Slava Ukraini!

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