Condominium Deposit Loss due to Developer Fraud - How to treat the loss on taxes?
I would like to know how to treat a loss incurred as a result of a condominium deposit loss (This is NOT a case of the buyer walking away from a project). Timeline:
5/2005: A friend (no relation/formal partnership) and I signed a Sales Agreement for a pre-construction 1 bedroom condominium in Miami Beach with a sale price of $460K and an expected delivery date of 5/2007. We gave a deposit of $23K each ($46K total). The plan was for my wife and I to reside in the unit and for my friend to retain a financial stake in the property as an investment. There was no plan to flip the property, etc. Neither of us are currently Florida residents.
10/2005: The developer said construction had commenced and we provided the balance of the deposit due - $23K each ($46K total); The developer had now collected a total of $92K in deposits from us. As it turned out, the developer had lied and construction did not begin for another year.
5/2007 to the Present: The developer failed to complete construction or provide our unit as per the contract. The developer refused to return any deposit funds. The building remains partially-built with no active construction.
2/2009: The primary lending bank foreclosed on the developer and the project.
3/3009: The court appointed a receiver finding that the developers "no longer have the desire or ability to maintain and operate" the project.
Present: We are involved in litigation with the developer with a trial date expected shortly. Of our $92K in deposits, $46K remains in escrow, $46K cannot be accounted for and we have been advised that the chance of recovery is nil. The developer refuses to release our funds in escrow and refused to negotiate at court-ordered mediation. Per our lawyer, if we win in court, the best we can hope for is a return of the $46K in escrow. After legal fees and expenses, the most we can hope to actually recover is $20K (or $10K each).
1) Let's say we prevail in court and the judge orders the release of our funds in escrow: We would have each provided $46K in deposits, gotten back $23K each, and paid $13K each in legal fees. So we would have each gotten back $10K of our $46K, losing $36K each. How do we declare this loss on our 2010 tax returns?
2) I have read opinions both for and against the loss being a Non-Business/Personal Bad Debt to be declared as a short term capital loss on Schedule D and the loss being a Casualty Loss to be declared on Schedule A. Obviously, the former is more favorable to us, but, since we never actually owned anything, can this loss really be listed on Schedule D? Are these the only options?
3) When declaring the loss, does one lump the legal fees in with the amount stolen by the developer or do you list the total amount recovered and then somehow account for the legal costs associated with the recovery, ie, are the legal fees/costs also considered a loss?
4) Given that my friend and I each obviously file separate tax returns, do we need to coordinate our returns in some way in terms of documentation, etc, to account for the fact that each of us is only declaring half of the total loss?
5) Assuming a court decision is rendered in 2010, is the appropriate time to declare the loss on our 2010 returns?
6) What if we lose the court case? In this instance we will have lost $46K each. Are we still able to declare a loss? What if the developer claims the project will "eventually" be completed and our Sales Agreement is not voided due to the litigation?
If it is of any consequence in terms of original intent/type of loss, my wife and I finally gave up on this project and purchased an existing condominium elsewhere in Florida in 2009 - we now split our time between that property and our primary residence in the Northeast.
Please let me know if any further information is required to clarify how to treat the loss.
>>Any help/suggestions are greatly appreciated!