Discussion:Form 6252--Installment sale question
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Discussion Forum Index --> Tax Questions --> Form 6252--Installment sale question
DR BRISKET (talk|edits) said: | 20 June 2006 |
| I am working on a 2005 individual return that is on extension. Client sold a home on contract in 1997. Each year since, client has received principle and interest payments from the buyer, with everything properly reported on Form 6252. In 2005, the buyer made only nine payments, then ran into financial difficulty. At the time, my client was still owed approx. $26,000. The house was appraised for $65,000. Client offered to re-purchase the home for $10,000, which buyer agreed to. My question is: What is the new basis in the home my client essentially re-possessed? My thinking is that I will need to go back to the original basis, and decrease it each year by the non-taxable portion of the principle payments including the nine payments received in 2005. To this figure, I would then add $10,000. Is this correct? Client is currently in process of refurbishing the home, and plans on selling it on a new contract in 2006. | |
| 20 June 2006 | |
| A reliable source? | |
DR BRISKET (talk|edits) said: | 20 June 2006 |
| Dennis: thanks for directing me to this. I should have done some more research on my own. I have actually dealt with an installment sale repo in the past, but it was quite a few years ago, and frankly, I forgot how this should be treated. But, after re-reading the rules from the above site, I now remember that one must recognize gain on the repossession for the non-taxable portion of the payments each year. The new beginning basis in the repossessed home reverts to the basis in the year of sale. The one peculiar element in the situation for my client last year is that she actually paid the buyer $10,000 to get the house back--a move I find to be most unusual. And, this brings up a second question: will the $10,000 cash my client paid to get the house back be added to the new basis, or can it be considered a repossession cost which would reduce the recognizable gain on the repossession? | |
| 20 June 2006 | |
| Gain on repossession of real property is basically boot. {less income already reported) $10,000 reduces. Essentially you started with a house and you ended with a house plus. | |
| 21 June 2006 | |
| The $10,000 is a cost of repossession and can be used to limit the recognized gain under Internal Revenue Code § 1038(b)(2)(B). The new basis of the property under Internal Revenue Code § 1038(c) would be the adjusted basis of the contract, plus the gain on repossession, plus the $10,000.
The adjusted basis in the contract would be the original basis of the property, plus the gain recognized on the installment contract prior to the repossession, minus the amounts collected from the buyer prior to the repossession. In your case, the new basis of the property will probably be the old basis plus the $10,000. | |
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