The client has invested several million dollars in various rental real estate projects in different states. Four years ago, the client deposited ten percent on signing each real estate contract and ten percent the subsequent year as as another contract deposit. Each of the real estate contracts is owned by a different limited liability company of which the client is the sole member of each respective company. None of the contracts have closed since these properties were all being built over the last four years. Now the properties are completed, and due to the down turn in the economy and negative cash flow that would result from owning these rental properties, rather than close on these rental properties the client is considering walking away from his contract deposits and wants to know what the income tax issues may be in deducting the lost monies, how the deduction could be taken on the client's personal return and when such losses may be deductible?

He requests a letter from you advising him of the issues related to the potential tax losses from his walking away from the rental real estate projects.