Internal Revenue Code:Sec. 1038. Certain reacquisitions of real property

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Location in Internal Revenue Code

     TITLE 26 - INTERNAL REVENUE CODE
      Subtitle A - Income Taxes
       CHAPTER 1 - NORMAL TAXES AND SURTAXES
        Subchapter O - Gain or Loss on Disposition of Property
         PART III - COMMON NONTAXABLE EXCHANGES
       

Statute

    Sec. 1038. Certain reacquisitions of real property
 
    (a) General rule
      If -
        (1) a sale of real property gives rise to indebtedness to the
      seller which is secured by the real property sold, and
        (2) the seller of such property reacquires such property in
      partial or full satisfaction of such indebtedness,
    then, except as provided in subsections (b) and (d), no gain or
    loss shall result to the seller from such reacquisition, and no
    debt shall become worthless or partially worthless as a result of
    such reacquisition.
    (b) Amount of gain resulting
      (1) In general
        In the case of a reacquisition of real property to which
      subsection (a) applies, gain shall result from such reacquisition
      to the extent that -
          (A) the amount of money and the fair market value of other
        property (other than obligations of the purchaser) received,
        prior to such reacquisition, with respect to the sale of such
        property, exceeds
          (B) the amount of the gain on the sale of such property
        returned as income for periods prior to such reacquisition.
      (2) Limitation
        The amount of gain determined under paragraph (1) resulting
      from a reacquisition during any taxable year beginning after the
      date of the enactment of this section shall not exceed the amount
      by which the price at which the real property was sold exceeded
      its adjusted basis, reduced by the sum of -
          (A) the amount of the gain on the sale of such property
        returned as income for periods prior to the reacquisition of
        such property, and
          (B) the amount of money and the fair market value of other
        property (other than obligations of the purchaser received with
        respect to the sale of such property) paid or transferred by
        the seller in connection with the reacquisition of such
        property.
      For purposes of this paragraph, the price at which real property
      is sold is the gross sales price reduced by the selling
      commissions, legal fees, and other expenses incident to the sale
      of such property which are properly taken into account in
      determining gain or loss on such sale.
      (3) Gain recognized
        Except as provided in this section, the gain determined under
      this subsection resulting from a reacquisition to which
      subsection (a) applies shall be recognized, notwithstanding any
      other provision of this subtitle.
    (c) Basis of reacquired real property
      If subsection (a) applies to the reacquisition of any real
    property, the basis of such property upon such reacquisition shall
    be the adjusted basis of the indebtedness to the seller secured by
    such property (determined as of the date of reacquisition),
    increased by the sum of -
        (1) the amount of the gain determined under subsection (b)
      resulting from such reacquisition, and
        (2) the amount described in subsection (b)(2)(B).
    If any indebtedness to the seller secured by such property is not
    discharged upon the reacquisition of such property, the basis of
    such indebtedness shall be zero.
    (d) Indebtedness treated as worthless prior to reacquisition
      If, prior to a reacquisition of real property to which subsection
    (a) applies, the seller has treated indebtedness secured by such
    property as having become worthless or partially worthless -
        (1) such seller shall be considered as receiving, upon the
      reacquisition of such property, an amount equal to the amount of
      such indebtedness treated by him as having become worthless, and
        (2) the adjusted basis of such indebtedness shall be increased
      (as of the date of reacquisition) by an amount equal to the
      amount so considered as received by such seller.
    (e) Principal residences
      If -
        (1) subsection (a) applies to a reacquisition of real property
      with respect to the sale of which gain was not recognized under
      section 121 (relating to gain on sale of principal residence);
      and
        (2) within 1 year after the date of the reacquisition of such
      property by the seller, such property is resold by him,
    then, under regulations prescribed by the Secretary, subsections
    (b), (c), and (d) of this section shall not apply to the
    reacquisition of such property and, for purposes of applying
    section 121, the resale of such property shall be treated as a part
    of the transaction constituting the original sale of such property.
    ((f) Repealed. Pub. L. 104-188, title I, Sec. 1616(b)(12), Aug. 20,
        1996, 110 Stat. 1857)
    (g) Acquisition by estate, etc., of seller
      Under regulations prescribed by the Secretary, if an installment
    obligation is indebtedness to the seller which is described in
    subsection (a), and if such obligation is, in the hands of the
    taxpayer, an obligation with respect to which section 691(a)(4)(B)
    applies, then -
        (1) for purposes of subsection (a), acquisition of real
      property by the taxpayer shall be treated as reacquisition by the
      seller, and
        (2) the basis of the real property acquired by the taxpayer
      shall be increased by an amount equal to the deduction under
      section 691(c) which would (but for this subsection) have been
      allowable to the taxpayer with respect to the gain on the
      exchange of the obligation for the real property.
 

Sources

    (Added Pub. L. 88-570, Sec. 2(a), Sept. 2, 1964, 78 Stat. 854;
    amended Pub. L. 94-455, title XIX, Sec. 1906(b)(13)(A), Oct. 4,
    1976, 90 Stat. 1834; Pub. L. 95-600, title IV, Sec. 404(c)(6),
    405(c)(3), Nov. 6, 1978, 92 Stat. 2870, 2871; Pub. L. 96-471, Sec.
    4, Oct. 19, 1980, 94 Stat. 2255; Pub. L. 104-188, title I, Sec.
    1616(b)(12), Aug. 20, 1996, 110 Stat. 1857; Pub. L. 105-34, title
    III, Sec. 312(d)(8), Aug. 5, 1997, 111 Stat. 840.)
 

Miscellaneous

                                 AMENDMENTS
      1997 - Subsec. (e). Pub. L. 105-34 amended heading and text of
    subsec. (e) generally.  Prior to amendment, text read as follows:
    ''If -
        ''(1) subsection (a) applies to a reacquisition of real
      property with respect to the sale of which -
          ''(A) an election under section 121 (relating to one-time
        exclusion of gain from sale of principal residence by
        individual who has attained age 55) is in effect, or
          ''(B) gain was not recognized under section 1034 (relating to
        rollover of gain on sale of principal residence); and
        ''(2) within one year after the date of the reacquisition of
      such property by the seller, such property is resold by him,
    then, under regulations prescribed by the Secretary, subsections
    (b), (c), and (d) of this section shall not apply to the
    reacquisition of such property and, for purposes of applying
    sections 121 and 1034, the resale of such property shall be treated
    as a part of the transaction constituting the original sale of such
    property.''
      1996 - Subsec. (f). Pub. L. 104-188 struck out subsec. (f) which
    read as follows:
      ''(f) Reacquisitions by Domestic Building and Loan Associations.
    - This section shall not apply to a reacquisition of real property
    by an organization described in section 593(a) (relating to
    domestic building and loan associations, etc.).''
      1980 - Subsec. (g). Pub. L. 96-471 added subsec. (g).
      1978 - Subsec. (e)(1)(A). Pub. L. 95-600, Sec. 404(c)(6),
    substituted ''relating to one-time exclusion of gain from sale of
    principal residence by individual who has attained age 55'' for
    ''relating to gain from sale or exchange of residence of an
    individual who has attained age 65''.
      Subsec. (e)(1)(B). Pub. L. 95-600, Sec. 405(c)(3), which directed
    the amendment of section 1083(e)(1)(B) of this title by
    substituting ''(relating to rollover of gain on sale of principal
    residence)'' for ''(relating to sale or exchange of residence)'',
    was executed to this section to reflect the probable intent of
    Congress because section 1083 does not contain a subsec. (e)(1)(B).
      1976 - Subsec. (e). Pub. L. 94-455 struck out ''or his delegate''
    after ''Secretary''.
                      EFFECTIVE DATE OF 1997 AMENDMENT
      Amendment by Pub. L. 105-34 applicable to sales and exchanges
    after May 6, 1997, with certain exceptions, see section 312(d) of
    Pub. L. 105-34, set out as a note under section 121 of this title.
                      EFFECTIVE DATE OF 1996 AMENDMENT
      Amendment by Pub. L. 104-188 applicable to taxable years
    beginning after Dec. 31, 1995, see section 1616(c) of Pub. L.
    104-188, set out as a note under section 593 of this title.
                      EFFECTIVE DATE OF 1980 AMENDMENT
      Section 6(c) of Pub. L. 96-471 provided: ''The amendment made by
    section 4 (amending this section) shall apply to acquisitions of
    real property by the taxpayer after the date of the enactment of
    this Act (Oct. 19, 1980).''
                      EFFECTIVE DATE OF 1978 AMENDMENT
      Amendment by section 404(c)(6) of Pub. L. 95-600 applicable to
    sales or exchanges after July 26, 1978, in taxable years ending
    after such date, see section 404(d)(1) of Pub. L. 95-600, set out
    as a note under section 121 of this title.
      Section 405(d) of Pub. L. 95-600 provided that: ''The amendments
    made by this section (amending this section and sections 1034,
    1250, 6212, and 6504 of this title) shall apply to sales and
    exchanges of residences after July 26, 1978, in taxable years
    ending after such date.''
     EFFECTIVE DATE; ELECTION TO APPLY TO TAXABLE YEARS BEGINNING AFTER
                               DEC. 31, 1957
      Section 2(c) of Pub. L. 88-570 provided that:
      ''(1) The amendments made by this section (enacting this section)
    shall apply to taxable years beginning after the date of the
    enactment of this Act (Sept. 2, 1964).
      ''(2) If the taxpayer makes an election under this paragraph, the
    amendments made by this section (enacting this section) shall also
    apply to taxable years beginning after December 31, 1957, except
    that such amendments shall not apply with respect to any
    reacquisition of real property in a taxable year for which the
    assessment of a deficiency, or the credit or refund of an
    overpayment, is prevented on the date of the enactment of this Act
    (Sept. 2, 1964) by the operation of any law or rule of law.  An
    election under this paragraph shall be made within one year after
    the date of the enactment of this Act and shall be made in such
    form and manner as the Secretary of the Treasury or his delegate
    shall prescribe by regulations.
      ''(3) If an election is made by the taxpayer under paragraph (2),
    and if the assessment of a deficiency, or the credit or refund of
    an overpayment, for any taxable year to which such election applies
    is not prevented on the date of the enactment of this Act (Sept. 2,
    1964) by the operation of any law or rule of law -
        ''(A) the period within which a deficiency for such taxable
      year may be assessed (to the extent such deficiency is
      attributable to the application of the amendments made by this
      section) shall not expire prior to one year after the date of
      such election; and
        ''(B) the period within which a claim for credit or refund of
      an overpayment for such taxable year may be filed (to the extent
      such overpayment is attributable to the application of such
      amendments) shall not expire prior to one year after the date of
      such election.
    No interest shall be payable with respect to any deficiency
    attributable to the application of such amendments, and no interest
    shall be allowed with respect to any credit or refund of any
    overpayment attributable to the application of such amendments, for
    any period prior to the date of the enactment of this Act. An
    election by a taxpayer under paragraph (2) shall be deemed a
    consent to the application of this paragraph.''