Taxes and books

How to bookkeep a terminated purchase agreement

When a purchase agreement is terminated, your bookkeeping needs to accurately reflect the cessation of the deal and the handling of any associated funds like earnest money. You must record any expenses incurred for that specific property as non-recoverable deal costs, rather than as part of an acquisition.

October 11, 2026 · 3 min read

Recording the termination in your books

The first step is to clearly mark the purchase agreement as terminated in your bookkeeping system, whether that is a spreadsheet or a dedicated software. This means closing out any open entries related to that specific property acquisition.

Do not just delete the entries. You need a record of the deal's initiation and its eventual termination. This historical data is important for understanding your deal flow and can be useful for future reference or audits.

Handling earnest money deposits

If you placed an earnest money deposit (EMD) and it is being returned to you, record this as a refund of an asset. The EMD was initially recorded as a current asset on your balance sheet.

If the EMD is forfeited to the seller, record it as an expense. This moves it from an asset to a non-recoverable deal cost. Be clear in your ledger about the nature of this expense.

Categorizing deal-related expenses

Any expenses incurred for the terminated deal, such as due diligence costs, inspection fees, legal fees, or travel, should be moved from an "acquisition in progress" type account to a dedicated expense category. A good category would be "Aborted Deal Costs" or "Due Diligence Expenses - Unsuccessful."

This ensures these costs are properly accounted for, even though they did not lead to a closed deal. Accurately categorizing these expenses is crucial for tracking your overall business performance and for future tax filing (consult a tax professional for advice on deductibility).

Documenting communication and reasons for termination

Beyond the financial entries, keep a clear record of the communications leading to the termination. This includes emails, text messages, and notes from phone calls with the seller, his or her agent, or the title company.

Documenting the reason for termination is just as important. Was it due to inspection issues, seller remorse, title problems, or something else? Having this information readily available helps you analyze your process and improve for future deals.

The importance of consistency for future audits

Maintaining consistent and accurate records for terminated deals is just as important as for closed ones. Should your books ever be audited, having a clear trail for every transaction, even those that did not close, demonstrates good financial management.

Consistency means using the same accounts and categories for similar types of expenses and clearly documenting every step. This prevents confusion and makes it easier to justify your financial statements.

Reviewing your overall deal tracking system

A terminated purchase agreement is a good opportunity to review your overall deal tracking system. Are you able to easily see which deals are active, which are terminated, and the associated costs for each?

Ensure your CRM or spreadsheet allows you to filter and report on these metrics. This helps you understand your conversion rates and where you might be incurring costs on deals that do not pan out.

Questions people ask

Do I need to track expenses for every terminated deal?

Yes, absolutely. Tracking expenses for terminated deals is essential for accurate financial reporting and understanding your business's true operating costs, even if the deal did not close.

What if the earnest money is forfeited to the seller?

If your earnest money is forfeited, you would record this as an expense in your books, moving it from a current asset to a non-recoverable deal cost.

How do I mark a deal as "dead" in my CRM/spreadsheet?

Create a specific status like "Terminated," "Cancelled," or "Dead" in your CRM or spreadsheet. Be sure to include a field for the reason for termination to easily track patterns.

Are these expenses deductible?

You should consult with a qualified tax professional regarding the deductibility of expenses incurred on terminated real estate deals. Tax laws can vary based on your entity structure and specific circumstances.