Token money in a real estate transaction is a good-faith deposit a buyer puts down shortly after an offer is accepted to show they intend to close. In the United States it’s almost always called earnest money, and it typically runs 1% to 3% of the purchase price. The funds sit with a neutral third party until closing, when they’re credited toward the buyer’s down payment or closing costs. If the deal falls apart under a protected contingency, the money comes back. If the buyer walks away without one, the seller usually keeps it.
It’s not an extra cost layered on top of the down payment. A successful closing simply applies the deposit to what you already owe. The risk shows up only when a buyer backs out for a reason the contract doesn’t shield.
How Much To Expect
On a $400,000 home, 1% to 3% works out to roughly $4,000 to $12,000. Competitive markets push the number higher, and the amount is always negotiable. A buyer with strong credit and a solid pre-approval may offer less; a seller fielding multiple offers often favors the buyer willing to put more at stake.1National Association of REALTORS®. Earnest Money in Real Estate: Refunds, Returns and Regulations
There is a legal ceiling on how aggressive a seller can be. Courts evaluate forfeited deposits under a reasonableness test. A deposit clause is enforceable as liquidated damages only if the amount is reasonable relative to the anticipated harm from a breach. An unusually large deposit that bears no relationship to the seller’s likely losses can be struck down as an unenforceable penalty.
How To Pay It Safely
Send the deposit to a licensed escrow agent, title company, or attorney’s trust account rather than directly to the seller. These third parties are required to hold the money in segregated accounts, so it stays untouched until both sides fulfill their obligations or a dispute is resolved. Handing cash or a check to a seller directly creates the risk that the money is gone if the deal collapses.
Wire Fraud
Wire fraud against real estate buyers is now a serious threat. From 2019 through 2023, more than 58,000 victims reported over $1.3 billion in losses from real estate fraud schemes.2Federal Bureau of Investigation. FBI Boston Warns Quit Claim Deed Fraud is on the Rise The usual scheme: a scammer compromises an email account at the real estate agency, title company, or law firm, then sends the buyer fake wiring instructions that redirect the deposit.
Get the wiring instructions early. Confirm them by calling a phone number you already have on file, never one printed in the email itself. Treat any last-minute change to account details as suspicious, especially on a Friday or before a holiday when banks are closed and recovery becomes much harder. A cashier’s check avoids the risk entirely, because the title company can verify it directly with the issuing bank.
Avoid Payment Apps
Don’t send earnest money through Zelle, Venmo, or similar apps. Zelle payments are irreversible once the recipient’s account is enrolled, and the service explicitly offers no purchase protection.3Zelle. Can I Reverse a Zelle Payment? Stick with cashier’s checks, certified checks, or verified wire transfers.
When You Get It Back
The purchase contract controls whether the deposit is refundable, which is why the contingency clauses are the most important part of the document. The common protections:
- Inspection contingency. If a professional inspection reveals significant defects, you can usually walk away with the full deposit.
- Financing contingency. If you apply for a mortgage in good faith but can’t get approved within the contract’s timeframe, the deposit comes back.
- Appraisal contingency. If the property appraises below the agreed price and the seller won’t renegotiate, you can cancel and recover the funds.
Every contingency carries a deadline. Miss the inspection window, delay the loan application, and the protection may evaporate even though the underlying issue is real. Treat the contract’s dates as hard cutoffs.
FHA and VA Buyers
Buyers using an FHA loan get an added safeguard. Federal rules require the purchase contract to include an amendatory clause stating the buyer isn’t obligated to complete the purchase or forfeit earnest money if the appraised value comes in below the sales price. The FHA won’t insure a loan without that clause.4U.S. Department of Housing and Urban Development. FHA Single Family Housing Policy Handbook
VA buyers have a parallel protection under 38 CFR § 36.4303(k)(4), known as the VA escape clause. It protects veterans from losing earnest money when the contract price exceeds the VA’s determination of reasonable value.5U.S. Department of Veterans Affairs. VA Escape Clause – VA Home Loans In either case the buyer may still choose to proceed; the clause only guarantees they don’t have to.
When the Seller Keeps It
If you back out for a reason the contract doesn’t cover, the seller is generally entitled to keep the deposit as liquidated damages. The money compensates the seller for time the property sat off the market and for buyers who moved on while your deal was pending. Most residential purchase agreements include a liquidated damages clause spelling out exactly what happens if the buyer defaults.
Sellers can’t always keep every dollar. A court may reduce the forfeiture if the amount is unreasonable compared with the seller’s actual losses. A $50,000 deposit on a $300,000 home where the seller relisted and sold within a week at the same price would be hard to defend. The deposit has to bear some logical relationship to the harm.
Commercial Deals Work Differently
If you’re buying commercial rather than residential property, the rules shift. Deposits are larger relative to the price, and contracts commonly include a due diligence period after which the deposit converts to “hard money,” meaning it’s non-refundable regardless of financing. The date of that conversion is critical. Missing it by a day can cost you the entire deposit.
If Both Sides Claim the Deposit
When a deal collapses and buyer and seller both demand the money, the escrow agent or broker holding it does not get to decide. The funds stay put until the parties agree on a split or a court orders a result.
The formal path is an interpleader action: the escrow agent asks a court to take custody of the disputed funds and decide who gets them. It removes the escrow agent from the middle, but it also adds legal costs. Many states allow the escrow agent to recover attorney fees from the deposited funds, which shrinks the pot before either side collects.
Most residential contracts require mediation before litigation. Mediation is faster and cheaper, and it resolves these disputes more often than people expect. For smaller amounts, small claims court is sometimes available, with jurisdictional limits running from roughly $5,000 to $20,000 depending on the state. Read the dispute resolution clause before you sign, because it dictates the route you’ll take if things go wrong.
Tax Treatment When the Deal Falls Apart
A normal closing creates no separate tax event; the deposit simply folds into the purchase price. The tax issues come up only when the sale fails.
A buyer who forfeits earnest money generally cannot deduct the loss. The IRS treats forfeited deposits, down payments, and earnest money as nondeductible personal expenses for homebuyers.6Internal Revenue Service. Publication 530 (2025), Tax Information for Homeowners
A seller who keeps a forfeited deposit has taxable income. It’s reported as other income on the federal return for the year it was received. The money feels like compensation for a broken deal, but the IRS treats it as income all the same.