REPOSSSESION OF REAL ESTATE*

*REPOSESSION OF AN OWNER-FINANCED REAL ESTATE SALE :
QUESTION:
I bought a house in Feb.2006 and did an owner-financed sale during 2006. In October 2006 the buyer defaulted and I foreclosed on them. Do I treat this as rental for the year? They paid $4000 down at the closing . All the money was used for the seller and new owner closing. Is this reported to IRS? Help.
ANSWER:
Check Publication 537, Pub 544 and IRC§1038.http://www.irs.gov/file/index.html

You cannot treat it as rental income.
Although it would not be the type installment sale with gains eligible to be spread out over multiple years, the method illustrated in Pub 537 could be used to calculate the gain on the repo. The only discussion of repoosession of real property in The TaxBook (page 14-10 and CCH’s 1040 Express Answers state that it would be a gain or loss and use the rules established for Installment Sales to illustrate.
The method illustrated and explained in Pub 537 boils down to:
[1] Gain on Repossession is the Total Principal collections for current + prior years MINUS gains reported in prior years. (in this case there would be no previously reported gains).
[2]Calculate the Total Gain based on original sales price minus basis. Subtract previously reported gains & Repo cost (in this case there would be no previously reported gains).
[3]Use the lesser of the above two as the taxable gain.

I have designed a worksheet, which can be used to make this type calculation.
The worksheet was designed with the type installment sale covering more than one year and reported on Form 6252.

I have developed several worksheets that get many requests for copies. I set up a Yahoo group to avoid an overwhelming number of email responses. You can find the INSTALLMENT SALE worksheet in the “Files” section of the Yahoo Group: TaxProExchange. (see links section of this blog for the link to the Yahoo group) It is in a folder entitled “Excel Worksheets”

You may also read my December blog regarding Settlement Statements, HUD Form 1.

REFERENCES KEY TOPICS:
WHERE TO FILE: http://www.irs.gov/file/index.html
RESTORED DEDUCIONS for Sales Tax
http://www.irs.gov//pub/irs-pdf/p600.pdf

OTHER FORMS AND PUBLICATIONS: (and Dec blogs)
Car Expense Pubs 334, 463 and 535

Sale of Principal Residence Pubs 523 and IRC § 121
Sec 179 write-offs for SUVs and other equipment Form 4562, Pub 946, IRC §167
Office in Home Form 8829, Pub 587
Mutual Fund - phantom profits, reinvested dividends: Pub 550 and 564
Alternative Minimum Tax Pub 929 (individuals) Pub 542 (corporations)

Link to IRS forms and publications:http://www.irs.gov/formspubs/index.html
Link to IRS Section Number: http://www.taxalmanac.org/index.php/Internal_Revenue_Code
To subscribe to IRS Newswire http://www.irs.gov/newsroom/content/0,,id=103381,00.html

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This information is not intended to be advice to the recipient. In compliance with Treasury Department Circular 230, unless stated to the contrary, any Federal Tax advice contained in this Blog was not intended or written to be used and cannot be used for the purposes of avoiding penalties.