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When you break a real estate contract, you pay a penalty. Many people think of this as a simple compensation payment, but under tax law, it's considered other income and is taxable. If you're the seller, you're required to withhold 22% when you pay the penalty, and if you don't report it, you could be subject to additional taxes. Conversely, if the buyer breaks the contract, no withholding is required, but the seller who receives the penalty must report it on the following year's comprehensive income tax return. How real estate penalties are taxed is more important than the amount. Make it a habit to check the tax implications of a contract termination. #realestatepenaltytax #penaltyincometax #realestatecontracttermination #penaltyotherincome #withholding #grossincometax