Deposit on House

Today TaxMama hears from Sheila in Pennsylvania with this question. “My daughter gave a personal friend $8,000.00 & signed a sale of agreement to purchase a house owned by the friend. After getting the money, the person changed her mind & said she would put the house in the hands of a real estate agent. Can my daughter take a loss on her income taxes? If so, would it be considered a capital loss?”

Dear Sheila,

Perhaps I’m not that smart; or I am easily confused. But I don’t understand how or why your daughter has a loss?

She gave this person (clearly NOT a friend) $8,000 and they both signed a contract for your daughter to buy this house. She either gets the house, or her money back.

First of all, if it’s a valid contract, why isn’t your daughter insisting that this jerk honor it and sell her the house?

Second, if this dishonorable fool refuses to sell her the house, why isn’t she returning your daughter’s money?

Third, you don’t get bad debt write-offs unless you make a good-faith effort to collect the money. Why isn’t your daughter doing that?

Your daughter doesn’t even need an attorney. She can sue her in Small Claims Court and place a lien on the house so she collects the money when the house sells. As it happens, in PA, the Small Claims limit is $8,000.

Heck, since the ‘friend’ won’t give the money back, your daughter might even be able to file criminal charges for the theft of the money.

Look, I don’t want to be practicing law without a license, so I do advise your daughter to invest in a hour or so with an attorney to review the contract and her options.

But it’s clear that, one way or another, your daughter does not have any tax deduction until she does something active to try to collect the money. And if she does take action, since there’s real estate involved, there’s no reason she shouldn’t be able to collect the money … unless, of course, there’s more to this story than you’re letting on.

And remember, you can find answers to all kinds of questions about friendly contracts and other tax issues, free. Where? Where else? At

[Note: If you were subscribed to the e-mailed TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the subscribe link and join us.]

File Download (0:00 min / 1 MB)