It was deemed?  By whom?

The bank could not recover it.

Was this their first vacation rental?  Might it be a start-up expense, to be amortized?  Or added to the basis for depreciation, if the sale closed anyway?  Do they really want to claim it all in 2021 even if they could?  

Was there a loan application involved, where they disclosed the property was to be used as a rental?  I would want to know a lot more facts and circumstances before venturing a guess.  But I'm sure if you asked three people at IRS, you would get two different answers and an "I don't know."  

If they are going to file a lawsuit maybe they think it is recoverable.

Here are additional details:

1) transaction did not close as a result of the wire fraud

2) this would have been their 2nd vacation rental

3) they are filing a lawsuit against the law practice that handled the deal - 50/50 chance of recovering from the lawsuit; law practice had NO insurance coverage in place for this type of loss 

4) $450k total funds involved, $300k recovered, $150k not recovered

5) FBI is involved in trying to recover the additional $150k as well

Thank you both!

I'm not sure what I would do with that situation, especially if there is a chance of recovery.  There might not be insurance, but a judgment for malpractice might still be collected over a period of years.