Earnest money released to me, but closing is next year...

Forum|Forum|6 years ago
September 17, 2019
2 replies
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I am selling my house to a developer and after a lengthy feasibility period the earnest money ($37,500) will be released to me directly. The closing date is 12 months from now. Will I have to report this as income and pay tax on it for 2019 or can i defer it until the sale is either fully closed in 2020?....or the buyer backs out (in which case i keep the money)

Thanks.

Best answer by Hi Palms

ask if you're going to get a 1099S....if so you need to report it.....either way it's like an option and should be reported when the sale closes....if no closing then report as other income.

Hi PalmsAnswer

ask if you're going to get a 1099S....if so you need to report it.....either way it's like an option and should be reported when the sale closes....if no closing then report as other income.

Carl11_2

Just my two cents here, as I haven't taken the time to look this up for this "specific" situation.

But basically, the money becomes reportable income as of the date *you* have direct control of it. So if the money has been released to you and you do "in fact" have full control of it (meaning you can spend it on anything you like as of the release date) then it's reportable income on your 2019 tax return.

So if someone can cite a specific IRS rule on this on the irs.gov website, I would fully expect the money is reportable income on your 2019 tax return.

Hi Palms

An earnest money deposit, received on the execution of a sales contract, is not income until the taxpayer acquires an unconditional right to retain the deposit. Bourne v. Commissioner, 62 F.2d 648, 649 (4th Cir. 1933), affg. 23 B.T.A. 1287 (1931). If the sale is consummated, it fixes the seller's right to retain the deposit, and the earnest money is included as part of the sales proceeds. Kang v. Commissioner, T.C. Memo. 1993-601; Kellstedt v. Commissioner, T.C. Memo. 1986-435. If the sale is not consummated, the sales contract fixes the seller's right to retain the deposit, and the deposit is included in income at the time that the contract fixes the seller's right to retain the deposit. Baird v. United States, 65 F.2d 911, 912 (5th Cir. 1933). Because earnest money is in the nature of a payment for an option, it is included in the seller's ordinary income when forfeited to him. Sec. 1234; Elrod v. Commissioner, 87 T.C. 1046, 1068-1069 (1986); see Kang v. Commissioner, supra (taxpayers' rights to earnest money were not fixed before they refunded a portion of it; amount they kept was included in ordinary income in year they made refund, not year they received earnest money).