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Posted by LoTax on June 17, 2006, 8:46 pm
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MTW wrote:
> A.G. Kalman wrote:
>> I will stick with my conclusion that the sale not having
>> been completed leaves the potential buyer with an ordinary
>> loss that can be taken on Schedule A subject to the 2% AGI
>> limitation.
> Pardon me jumping in here late.
>
> I think one would need to carefully research the nature of
> the "deposit" and specifically ~why~ it was lost. But, in
> general terms, assuming that the deposit would have been
> applied as part of a down payment had the transaction
> succeeded, I would consider it a short term capital loss. I
> say "capital" on the assumption that the failed transaction
> would have the same character in this regard as if it had
> succeeded. (By the same thinking, if the prospective
> purchaser of the realty was a DEALER, then I'd guess the
> loss to be "ordinary.")
>
> However, I think the larger issue - and the one that the IRS
> might be more likely to pursue if the loss came up on audit
> - is establishing that there was truly a business or
> investment intent with respect to the transaction. I'm sure
> the IRS would try to argue that it was "personal" in nature
> and therefore no loss was allowed.
Twenty years ago, I researched this very very diligently,
and well-motivated, and - as best I can recall - this should
be characterized as an *ordinary* loss, and reported on page
one of 1040. It's not a *capital* loss since it's neither a
sale nor an exchange and it's not susceptible to the
artificial capital loss "option" treatment(s) under IRC
section 1234 or somewhere around there in the code. I am
unable to retrieve the research now, but I would suggest
someone might want to look into the abandonment of a
partnership interest where there's no proceeds, not even
"deemed" proceeds from liabilities, as an analogy. IRS
published a ruling accepting the partnership situation as an
ordinary loss, and IIRC there's a parallel between these
scenarios. In addition, there's no such thing as
"short-term section 1231 loss" which is where this - maybe,
memory's failing - ends up in an alternative argument.
Sorry my archives are in such disarray; I might have been
able to pull this up a few years ago.
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