deducting expenses when properties fall through

2 Replies

Hello.  I am wondering how everyone deducts their expenses when offers fall through such as wire fees when they do not have ownership of that property for tax purposes.

Sarah Lawrence

    @Sarah Lawrence

    The answer to this question depends on several factors such as if you are already in the business of residential real estate.

    If you are not - some proponents will say it is non-deductible because you do not have a business; other proponents will say that this is a start-up expense and will not be deducted/capitalized until you purchase the first property.
    I am in the latter camp.

    Basit Siddiqi, CPA

      Originally posted by @Sarah Lawrence :

      Hello.  I am wondering how everyone deducts their expenses when offers fall through such as wire fees when they do not have ownership of that property for tax purposes.

      @Sarah Lawrence , even if you were in the startup phase, meaning you haven't acquired any property before, the fees such as wirefees to acquire a specific property have to be capitalized and later treat as a loss if deals fall through. 

      The normal cost paid to investigate or otherwise pursue the acquisition of real property need not be capitalized  if they relate to activities performed in determining whether to acquire real property and which real property to acquire. And, if you have not purchased any property- these general expenses would be treated as start-up expense like @Basit Siddiqi said.

      Since you have identified which property to invest, generally speaking, all the cost spent for the specific property know as" inherently facilitative costs" need to be capitalized as if the deal were gonna go through. 

      Meaning, 

      All the facilitative cost, such as appraisal, examination of title and wire fees, relating to the property that you were about to buy have to be capitalized. If the loss deal falls through, after you spent all the money, the capitalized cost is taken as an abandonment loss. So, Inherently facilitative costs must be capitalized even if the property is never acquired and recovered later via loss if deals fall through. 

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