Taxable Deduction of Deposit?

Question

I put $50,000 down on a property that I am buying through the owner.  The closing is in January.  How can I deduct this on my taxes?

Bill B. · Answer

You’re paying $50,000 in rent for one month? is that what you’re going to tell the IRS? You’d still have to pay full original asking price plus the $50,000 if this is rent. (I’d just take your $50,000 in rent and then re-list the property if I was the seller. ) Make sure you continue to rent the property out for about $50,000 per month after you buy it or it might look like tax fraud. Same thing if it’s a due diligence  fee. You have to pay full asking price on top of this fee.

Bill B. · Answer

Even if you put the money down today it’s not a tax deduction. You aren't spending the $50,000.  You’re purchasing an investment. Get your tax guy on board. It certainly sounds like you’re going to need him/her next year anyway.

Josue Vargas · Answer

Seems like you have some experienced in the matter.  Not sure what are your expectation here.  Educated guess at best, or connections.  I believe this is a question for a lawyer/attorney with experience in Real Estate.  Good luck.

Josue Vargas · Answer

We do, but who knows, maybe the investment property worth $5M with a lot of extras for the proper tenant.

Debra Mowery · Answer

Thank you for your input.  My thoughts were basically the same in that if the $50,000 was used in a due diligence fee that is non-refundable or a fee for the use of the property that did also decrease the cost of the property there may be a deduction allowed or some depreciation.

Regardng the comment on brokers.  I am both a broker and an accountant.  My job is to work with investors and clients that utilize real property for financial growth while looking for creative and legal methods to reduce their tax obligations.

This appears to be a good forum to get some solid feedback.

Thanks for your comments

Basit Siddiqi · Answer

@Debra MoweryDoes the contract say the $50,000 is earnest deposit or rent?Earnest money towards the purchase price is not a deduction. It is simple a down payment towards the purchase of a property. The purchase of the property may allow for some sort of depreciation / bonus depreciation in the year of purchase.

Debra Mowery · Answer

The property is over a million and is an expansion for an existing very successful brewery.  There would be equipment and improvement construction involved.

Christopher Smith · Answer

I wonder if agent's ever read these threads 😂

Debra Mowery · Answer

What if the $50,000 is treated as rental of the property prior to closing or a non- refundable due diligence fee?

Jim Kennedy · Answer

You won't be able to deduct it this year under the circumstances you presented. It will, however,  be incorporated into the property's cost basis. If you're renting the house, you'll be able to deduct it ratably over its life - residential or commercial. If you're flipping it, it will be part of the basis used in determining your gain or loss.

Hope that helps. Happy investing!

Jim Kennedy

Taxable Deduction of Deposit?

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