When your attempt to purchase rental property fails, two types of costs are considered

  • Capital acquisition costs
  • Start-up expenses

Capital acquisition costs are those costs that you capitalize and add to basis.  Two examples of rental capital acquisition costs are

  • Earnest money
  • Inspection and appraisal

Because you entered into this capital acquisition to make a profit, you can deduct your failed capital acquisition as a loss on IRS Form 4797¹ for the full amount of the costs.
Start-Up expenses are costs incurred to create or acquire a business or rental.  For example, if you incurred travel expenses in pursuit of starting your rental business which failed, your travel costs are in oblivion.

  • If you start another rental business, the failed travel costs will produce tax benefits on the new rental as start-up expenses.
  • If you do not start another rental business, the travel costs are lost when you die.

If you would like to learn more about this tax strategy, please call Susan at 847.895.9880
¹ IRC Section 165