End of Installment Sale

[LindaB]

Taxpayer sold a house in 2002 on land contract. The house belonged to his mother, she gave it to the taxpayer and his wife in 2000, and they sold it in 2002 to the taxpayer's sister. The tax preparer who did the 2002 tax return said the taxpayer's basis in the house was zero, since his mother had given it to them. The gross profit percentage on the form 6252 is 99.45%.

The first year I did the taxpayer's return was for 2005, by then he was divorced. He and his ex-wife split the income from the land contract and the property. I told him the basis in the house would not have been zero, that I could amend the 2002 and following years, but he didn't want to because it would have involved talking to his ex-wife.

In Feb. 2007 the taxpayer gave his half of the property to his sister, for $10, when his half of the principal balance was $38359.

Besides showing the two months worth of interest and principal payments on his 2007 return, what do I need to do? Do I show this as a sale on Sch D? His half of the basis from the original installment sale is only $211 (working back from the gross profit % and the sales price).

Thanks for any help, I'm having a hard time thinking about this.....