Forfeited deposits – the tax consequences to the purchaser

Sydney, September 8, 2010 – In most circumstances when a purchaser enters into a contract to purchase property he is requested to pay a deposit. However, should the purchaser forfeit his deposit by deciding not to proceed with the contract there are some serious tax consequences.

In an ATO Tax Ruling the Commissioner clearly states that where the purchaser decides not to proceed with a contract and forfeits the deposit, the purchaser will generally not be entitled to claim a capital loss. On the other hand, the seller, would in most cases, include the deposit as a capital gain in his tax return.

For example, Mr. X purchases a rental property from Mr. Z for $1 million and pays a deposit of $50,000. Later Mr. X decides not to proceed with the purchase because he is concerned that interest rates may increase, or he decides the property is not suitable. As a result, Mr. X forfeits his deposit of $50,000. In these circumstances the ATO view is that Mr. X will not be entitled to a tax deduction or capital loss of $50,000. However, Mr. Z will have to return the forfeited deposit of $50,000 as a capital gain.

It should be noted that there are limited circumstances where a capital loss can be claimed and taxpayers should get professional advice before deciding to abandon or forfeit their deposits.

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