Repossession of land sold on Installment Sale

[Kea]

Well, actually it doesn't qualify for installment sale since it was sold at a loss.

Client purchased land for investment for $30K. 1 1/2 years later he sold it for $25K with $5K down and rest paid over 2 years. A bit over a year later the buyer stopped paying and 3 months later client forclosed.

I found the worksheets for calculating the taxable gain and basis for repossessions on installment sales - but that's for sales with profits. I didn't find anything in the Basis publication (551) that addressed repossessions -- but perhaps I didn't look in the right place.

So is this the proper way to calculate the taxable gain on repo?

principal portion of all payments received (prior to repo)

less cost of repo

Then the basis of the repossessed land becomes:

unpaid balance on loan (at time of last payment or at time of foreclosure?)

plus taxable gain on repo

plus cost of repo

Client took loss on sale in year of sale (Sch D). Interest received has been reported each year.

Balance of loan was $7900 when last payment received. Balance was $8020 @ foreclosure after adding 3 months interest not paid.

Thanks

[Lion EA]

Pub 544 has a chart and examples. (Haven't done one of these since homework for EA course!)

[Kea]

I'm sorry Lion - I think I'm just extra dense this year. I'm not seeing a chart of examples in Pub 544. When I search the pub for "repos"sessions, I find examples for the the buyer. For the seller, I found an explanation of the holding period. But otherwise they sent me back to the Installment Sales pub 537 - which is where I started. It also referred me to Pub 4681 (Canceled Debt, Foreclosures, Repossessions, ...). There I could still only find references to the buyer, not the seller.

[jainen]

>>Client took loss on sale in year of sale (Sch D). Interest received has been reported each year.

Balance of loan was $7900 when last payment received. Balance was $8020 @ foreclosure after adding 3 months interest not paid.<<

I think you are confusing the question by including irrelevant details. If there had been a gain reported on the installment method, you would have to recalculate the gain. But the loss is history,. Same with interest wihich has already been reported. As for the balance of the loan, cash basis taxpayers don't get to deduct bad debts.

If he received property in exchange for the note, his gain or loss is determined by the current FMV of the property received compared to his basis in the note, presumably FMV of property when sold minus payments on principal.

[Lion EA]

What Jainen said. (I was looking at a really old Pub. 544 quoted in a really old HRB text; the chart with a column for buyer and a column for seller might've been specific to HRB. Although, HRB usually ripped their examples straight from the IRS pubs.)

[Kea]

I'm not trying to deduct a bad debt. I did throw out extra information because I wasn't sure if it was relavent or not. Normally determining basis is very easy and straightforward to me. But I keep thinking myself in circles on this one. I'm sure I'm just over-thinking it. I think I'm getting confused by getting back an asset that was sold but without "paying" for it -- just not getting full payment so he gets back whole property. (Yes, I know that didn't make sense.)

And just to verify / "thinking out loud":

basis in note = FMV @ sale (= sales price) - payments on principle

This sounds like the balance of the loan [which would NOT include the additional 3 months interest between last payment & foreclosure]

Gain (/ loss) on repo = FMV at foreclosure - balance of loan

so IF FMV at repo = FMV at sale

then gain on repo = principal received

(that is starting to sound logical!)

IF FMV at repo <> FMV at sale

then gain on repo = principle received +/- increase / decrease in FMV

(makes sense)

And this gain on repo is reported in year of repo, right? Original sale was shown on Sch D, so this goes on D. But the property wasn't "sold." Schedule D would show sale of "note"??

Now basis of land becomes FMV at repo, right?

I think I might be starting to swim out of this fog. (Maybe)

I will see if I can dig out my old HRB books from the late 90s. They should be around here (probably buried under more current books.)

Thanks Jainen & Lion.

[Dale in IN]

Kea :

Go to Pub 537, Page 13-15 explains how to handle repossession of real property. first paragraph page 13.

"REAL PROPERTY.

The rules for the repossession of real property allow you to keep essentially the same adjusted basis in the repossessed property you had before the orginal sale. You can recover this entire adjusted basis when you resell the property. This in effect , cancels out the tax treatment that applied to you on the orginal sale and puts you in the same position you were in before that sale.

As a result the total payments you have received from the buyer on the original sale must be considered income to you."

Your client is not going to be a happy camper!

If you go on down and fill out the work sheet D You should come up with the amt of payments made on Lines 1,3,6 and possibily 8 unless there was some repo expense.

Then go to work sheet E and line one is the unpaid balance. You had no profet % so line 4 is the same and on line 5 enter your line * from work sheet D and you should have your orginal sales price as a basis . And your loss has already been taken care of at the time of the installment sale.

Your 3 Months interest never recieved can not be claimed as it was never included in income.

Dale.

[Kea]

Thanks Dale. That's basically what I was looking at in my original post. I was trying to modify Worksheets D & E and using 0% gain & $0 profit. So by entering 0s on those lines, what I listed was what the formulas simplified to.

Then by adding in Jainen's help, I modified my original summation by the change in FMV.

I think I'm finally geting this! I just have to work through these things logically & here I was getting hung up on the lack of "sale", i.e. the repo undoing a sale. But if I think of it in terms of the note being "sold" it starts making more sense to me.

Thanks to all.

[Kea]

Looking at the worksheets in Pub 537 (installment sales) I see where they discuss the FMV at date of repo for personal property, but I don't see it for real property. So it doesn't apply here?

I got the cost of repossession & FMV of land @ repo today.

Purchased 10/08 for $30K

Sold 12/09 for $25K

In 2009 reported $5K loss on Sch D on sale of land

Total payments received, including down payment = $17K

Balance remaining = $8K

(interest was / is reported on Sch B in 2010 & 2011)

Cost to lawyer for repo = $1500

FMV @ repo = $19

Gain on Repo:

Total payments = $17K

(no gain on original sale)

less Cost of repo = $1.5K

taxable gain on repo = $15.5K

Basis of Repo:

Unpaid Balance = $8K = adjusted basis on date of repo (since no gross profit %)

+Taxable gain on repo = $15.5K

+Repo cost = $1.5K

Basis in repo = $25K (which brings us right back to the original sale price)

So after all the computations, I report on Sch D the "sale" of the note?

basis of note = $9.5K = $8K + 1.5K = unpaid balance + cost of repo

selling price = $25K = Basis of repo

Acq Date = 12/09 = date of sale of land

Selling date = 5/11 = date of repo

long term gain = $15.5K

Then the next time he sells the land the basis = $25K.

Have I finally got this? Does the decrease in FMV come into play so that the Sch D gain is only $9.5K? ($15.5K gain calculated above less 6K loss in FMV)? It seems like he "sold the note" for $19K since that is the FMV of the land he got back.

I'm sorry I keep bugging y'all on this one. I just seem to have a huge mental block trying to wrap my head around this. Yes, I get that the "gain" is the principal payments he received because he now has the land again. My biggest hangup is determing what goes on the Schedule D - what is he selling in 2011? The note?

[Dale in IN]

Kea:

That sounds Right. I have played with this all morning for I have about the same thing coming up tomarrow. Only it involves the repo of a personal residence. The only aother alternative would be to defer the gain and keep the basis of $9580 as basis for a future sale.

How ever that is not what the repo reals state. The first 2 paragraphs of Pub 537 page 13 state that that is a taxable gain. I do not beleive the FMV on the date of repossession is involved. If the property would be resold at that amount at a latter date then you would have another loss.

[Kea]

Thanks Dale. I really appreciate it. I'm glad it sounds like I'm doing it right. Even if I don't have the "semantics" correct, I think at least I have the taxable income correct. And that's the most important part!