Is an Earnest Money Refund Taxable Income?

[Jeff Sharpton]

We made an offer on some apartments last August and the Sale Agreement included $20,000 in escrow and $5,000 cash to go toward some current improvements. We cancelled the deal because of some unknown issues at the end of Due Diligence, so we got the $20,000 back right away. The seller promised to give us back the $5,000 when he could. We put a lien on the property to protect the $5,000 through Franklin Escrow, LLC.

Long story short, the seller found another buyer and they closed last week, releasing our $5,000. It was wired to Franklin Escrow from the closing company, but now Franklin wants us to fill out a W9 before they will release our money.

What am I missing? Why is our earnest money refund now considered taxable income?