artp Posted February 21, 2019 Report Share Posted February 21, 2019 Taxpayer sold his personal residence (lived in for 5 years) in 2015 on a contract for deed for $35,000; cost basis $53,000 so no gain or loss was reported in 2015. For all subsequent years he reports the interest received on the note. In 2018 buyer defaulted on the balloon payment that was due on the note and taxpayer took the property back. He then sold it again later in 2018 on a contract for deed for $33,000. Question: How to report the transaction on his 2018 return? Does the status of the property change from personal residence to investment property? What is his tax basis upon the date the buyer defaulted? Quote Link to comment Share on other sites More sharing options...
jklcpa Posted February 22, 2019 Report Share Posted February 22, 2019 These should help: § 1.1038-2 - Reacquisition and resale of property used as a principal residence. Pub 537 for installment sales deals with dispositions of installment obligations, repossessions, and resales- starting on page 12 Quote Link to comment Share on other sites More sharing options...
artp Posted February 22, 2019 Author Report Share Posted February 22, 2019 Thanks. I will check this out, but I am dealing with a loss transaction so I don't know if the discussion in the referenced material is on point. Quote Link to comment Share on other sites More sharing options...
artp Posted February 22, 2019 Author Report Share Posted February 22, 2019 I took a close look a the reg 1.1038-1(a) (1) and my understanding is given the facts in my case no gain or loss is recognized on the reacquisition of the house since it was originally sold at a loss and therefore no Sec 121 election was made on the original sale. See below: Does anyone have a different opinion? § 1.1038-1 Reacquisitions of real property in satisfaction of indebtedness. (a)Scope of section 1038 - (1)General rule on gain or loss. If a sale of real property gives rise to indebtedness to the seller which is secured by the real property which is sold, and the seller of such property reacquires such property in a taxable yearbeginning after September 2, 1964, in partial or full satisfaction of such indebtedness, then, except as provided in paragraphs (b) and (f) of this section, no gain or loss shall result to the seller from such reacquisition. The treatmentso provided is mandatory; however, see § 1.1038-3 for an election to apply the provisions of this section to certaintaxable years beginning after December 31, 1957. It is immaterial, for purposes of applying this subparagraph, whether the seller realized a gain or sustained a loss on the sale of the real property, or whether it can be ascertained at the time of the sale whether gain or loss occurs as a result of the sale. It is also immaterial whatmethod of accounting the seller used in reporting gain or loss from the sale of the real property or whether at the time of reacquisition such property has depreciated or appreciated in value since the time of the original sale. Moreover, the character of the gain realized on the original sale of the property is immaterial for purposes of applying this subparagraph. The provisions of this section shall apply, except as provided in § 1.1038-2, to the reacquisition ofreal property which was used by the seller as his principal residence and with respect to the sale of which an electionunder section 121 is in effect or with respect to the sale of which gain was not recognized under section 1034. Quote Link to comment Share on other sites More sharing options...
Gail in Virginia Posted February 22, 2019 Report Share Posted February 22, 2019 I think the code section is very much on point as far as the type of property - personal residence or investment - after repossession. And i don't think the fact that this was a loss transaction affects that. Quote Link to comment Share on other sites More sharing options...
artp Posted February 22, 2019 Author Report Share Posted February 22, 2019 6 hours ago, Gail in Virginia said: I think the code section is very much on point as far as the type of property - personal residence or investment - after repossession. And i don't think the fact that this was a loss transaction affects that. Gail are saying that there is a loss to be recognized for tax purposes on the repossession? The type of property is still considered personal residence? The 2nd contract for sale price is still less than his original cost basis so this would be a sale of personal residence at a loss, so not recognized for tax purposes? Art Quote Link to comment Share on other sites More sharing options...
Gail in Virginia Posted February 23, 2019 Report Share Posted February 23, 2019 That is the way I would interpret the code section Judy referenced. The character of the asset did not change because it was repossessed since he resold it within a year. If he had a gain, he would have still been able to defer the gain. Since it is a loss, and remains a loss, I think it is still a personal loss. But I have to admit I have only had one of these before and it was a gain. Quote Link to comment Share on other sites More sharing options...
artp Posted February 23, 2019 Author Report Share Posted February 23, 2019 Thanks Gail. Yes, he will still have a loss on the 2nd contract for deed so I am reporting the sales proceeds since it was reported on 1099-S just to have it on record, but no recognized loss for tax purposes since it is still a personal residence. Art Quote Link to comment Share on other sites More sharing options...
Recommended Posts
Join the conversation
You can post now and register later. If you have an account, sign in now to post with your account.