I own a couple of rental homes that are very cash flow positive, so I was looking to buy another investment property. I found a duplex and put a contract on it, but based on the inspector's report I backed out of the deal and did not purchase it.

Is the cost of the inspection (~$500) deductible against my income from the other properties I own? What about the deposit ($100) I gave up by backing out during the option period?

  • Do you report your rentals on schedule E or schedule C? – user662852 Jun 4 '16 at 23:00
  • Why would you think C? With 2 properties, he's not a full time RE investor. – JTP - Apologise to Monica Jun 4 '16 at 23:30
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    I use Schedule E – JohnFx Jun 4 '16 at 23:42

No, you cannot generally deduct these expenses. These are investigatory expenses that you made before acquiring the property. Had you acquired it - they would be added to the basis as part of the closing costs, but since you actually have not purchased an asset - you have nothing to add to the basis of. This has been the settled law after a Tax Court decision since 1931.

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  • Does your answer change if he's a professional RE investor? i.e. more than 750hrs/yr & major job? – JTP - Apologise to Monica Jun 6 '16 at 9:33
  • Wouldn't these be allowed as "investment expenses" under the miscellaneous itemized expenses subject to the 2% floor, if there's nowhere else specific to report them? These are expenses incurred to research and decide on an investment. I am not certain which is why I didn't put in my own answer. – user662852 Jun 6 '16 at 13:11
  • And could the expired option be reported as a $100 loss on schedule D? – user662852 Jun 6 '16 at 13:13
  • @JoeTaxpayer for professional investor as you described this would be a business expense. Professional investor treats assets as inventory and doesn't set up a new business for each asset. The OP does, since he said he's a retail (Schedule E) investor. – littleadv Jun 6 '16 at 16:36
  • @user662852 no, because no investment was made. Similarly, no loss since no asset was disposed of. There was no expired option. He signed a contract and backed out of it. – littleadv Jun 6 '16 at 16:37

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