Earnest Money Taxable? Can you show expenses against it?

[taxbrewster]

Ok, here is something I have not seen before...Client brought this too me earlier this week. DId a bit of research and see some conflicting information and really could not find a case that was like the one I have.

T/P was selling his house (primary res) - buyers put 25k in escrow - deal fell apart. T/P got to keep 25k.

Now, I believe the 25k is ordinary income - line 21. He also incurred 20k in expenses in dealing with this process (lawyers and some changes to the home before the deal went south). Could those expenses go to Sch A?

Now, I have also located a couple of times where the transaction was reported on Sch D - short term gain...

Has anyone dealt with this before or offer any guidance?

Thanks!

[ILLMAS]

From Publication 529, page 8 & 9

Other Expenses

You can deduct certain other expenses as miscellaneous itemized deductions subject to the 2%-of-adjus- ted-gross-income limit. On Schedule A (Form 1040), line 23, or Schedule A (Form 1040NR), line 9, you can de- duct the ordinary and necessary expenses that you pay:

1. To produce or collect income that must be included in your gross income,

2. To manage, conserve, or maintain property held for producing such income, or

[Richcpaman]

Actually, I would check that.

You state this is the "Primary Residence" being sold?

The T/P received $25k as an EM deposit?

I would treat that as a reduction in their basis in the home, and then add the expenses for lawyers/construction to the basis.

IF the T/P was selling a rental, or commercial property, then it is treated like an Option, and that would be taxable.

Rich

[michaelmars]

i agree with Rich as to the personal residence part. Not sure on a commercial transaction, there might be some way to consider it cap gain not ordinary.

[taxbrewster]

@rich yes T/P got 25k of earnest money as a deposit - deal fell apart - he got to keep the cash.

Thanks for the information....that is very helpful.