jasdlm Posted February 8, 2009 Report Share Posted February 8, 2009 Client inherited a contract for deed in 2006. $53,000 was the value of the contract when it was inherited. In April of this year, client got the property back. (Purchasers voluntarily left the property . . . unpaid balance of note was $50,056.88.) Client had property appraised after return. Appraisal was $42,000. I'm thinking that I use $42,000 (less land value . . . it's a residential rental) for depreciation/basis purposes. Is there a way I can take a loss on the contract for deed? Thanks. Quote Link to comment Share on other sites More sharing options...
RoyDaleOne Posted February 8, 2009 Report Share Posted February 8, 2009 I am not sure this applies, Sale on installment, http://www.irs.gov/publications/p537/ar02....publink10001274 However this may apply, Regs. Sec. 1.453-6. Deferred payment sale of real property not on installment method Quote Link to comment Share on other sites More sharing options...
LindaB Posted February 8, 2009 Report Share Posted February 8, 2009 Was this an installment sale? If it was, did your client continue to report the income on form 6252, and use the the gross profit percentage from the original sale? In pub. 537 Installment Sales it says: A disposition generally includes a sale, exchange, cancellation, bequest, distribution, or transmission of an installment obligation. An installment obligation is the buyer's note, deed of trust, or other evidence that the buyer will make future payments to you. If you are using the installment method and you dispose of the installment obligation, generally you will have a gain or loss to report. And later it says: If you dispose of the obligation in any other way, [other than to sell or exchange it] your gain or loss is the difference between your basis in the obligation and its FMV at the time of the disposition. The only problem I see in taking the loss is in determining the basis. Quote Link to comment Share on other sites More sharing options...
RoyDaleOne Posted February 9, 2009 Report Share Posted February 9, 2009 The contract for deed was inherited and is now IRD. Quote Link to comment Share on other sites More sharing options...
LindaB Posted February 9, 2009 Report Share Posted February 9, 2009 It looks like you have to use the origianl gross profit percentage to figure the basis. In this case, with outstanding loan of $50057 and FMV of $42000, if the gross profit percentage is 0.161, there would be neither gain or loss on taking back this property. If the gross profit percentage is higher--ie. 0.2-- then there would be a gain. Probably not what your client wants to hear. Quote Link to comment Share on other sites More sharing options...
Maribeth Posted February 9, 2009 Report Share Posted February 9, 2009 Client inherited a contract for deed in 2006. $53,000 was the value of the contract when it was inherited. In April of this year, client got the property back. (Purchasers voluntarily left the property . . . unpaid balance of note was $50,056.88.) Client had property appraised after return. Appraisal was $42,000. I'm thinking that I use $42,000 (less land value . . . it's a residential rental) for depreciation/basis purposes. Is there a way I can take a loss on the contract for deed? Thanks. The basis in the property is the unrecovered basis in the installment obligation, plus any gain recognized on the repossession, plus any repossession costs. So, if you GP% on the original sale was 20%, your unrecoverd basis is .80*50057 = 40,046. To that number you add any repossession costs AND the gain on the repossession. Your gain on the repossession is the amount of the principal payments that were recovered basis. So using the 20% again: of the $2943 in principal payments received, you had previously reported .20*2943 = 589 as gain. This year you have to report the remainder of 2943-589 = $2354 as gain. Why? Because you received the money and then got the property back. Without any repo gains, I would calculate your new basis as 40046 + 2354 = 42,400. HTH, Maribeth Quote Link to comment Share on other sites More sharing options...
jasdlm Posted February 9, 2009 Author Report Share Posted February 9, 2009 You all are fantastic. Thanks very much. I read the publication Roydaleone and Linda referenced. I also tried to work through the formula Maribeth suggested. My problem is, I have no idea what the original Gross Profit percentage was. Am I missing something? Is there some way I should be able to calculate that number? The original note holder was not my client. So far what I have done: looked at total principle recovered since my client inherited the note . . . subtracted from this the gain claimed on 2006 and 2007 returns. Claimed the remainder as gain for 2008 and added that gain number to the basis of the property. (Property is now rented, so used the new basis less land value for depreciation.) Does this sound reasonable? Thanks again for taking time to help. Your advice has given me great direction. Quote Link to comment Share on other sites More sharing options...
Maribeth Posted February 9, 2009 Report Share Posted February 9, 2009 "My problem is, I have no idea what the original Gross Profit percentage was. " You should be able to determine your gross profit % based on the numbers on your 6252. If total principal payments received for a year are 1000 and the gain recognized is 200, then you have a 20% gross profit. You CANNOT determine the basis in the repossessed property without determining this number. Maribeth Quote Link to comment Share on other sites More sharing options...
jasdlm Posted February 9, 2009 Author Report Share Posted February 9, 2009 Thanks, Maribeth. I think I have been trying to make the Gross Profit percentage calculation too complicated. I was trying to come up with the original GP for the father of my client. Aaargh. I'm not thinking very well. Thanks so much! Quote Link to comment Share on other sites More sharing options...
jasdlm Posted February 9, 2009 Author Report Share Posted February 9, 2009 Okay . . . I'm maybe thinking about this too much, and getting myself really confused. Client inherited the contract for deed. Wouldn't he get a step-up in basis that would essentially set his basis at the amount of the remaining principle on the installment sale? If so, why would he need to file a 6252 . . . the only income he would have had in 2006 and 2007 would be interest income? I have tried to research this, but I am obviously not looking in the right places. I may have to go back and amend his 2006 and 2007 returns, which I will do, but I want to make sure that I have this straight in my mind before I do. Essentially, isn't his GP 0%? (since his step-up in basis gives him a basis equal to the contract principle) Have I totally missed the boat here? Thanks for all your time. Quote Link to comment Share on other sites More sharing options...
Maribeth Posted February 9, 2009 Report Share Posted February 9, 2009 Okay . . . I'm maybe thinking about this too much, and getting myself really confused. Client inherited the contract for deed. Wouldn't he get a step-up in basis that would essentially set his basis at the amount of the remaining principle on the installment sale? If so, why would he need to file a 6252 . . . the only income he would have had in 2006 and 2007 would be interest income? I have tried to research this, but I am obviously not looking in the right places. I may have to go back and amend his 2006 and 2007 returns, which I will do, but I want to make sure that I have this straight in my mind before I do. Essentially, isn't his GP 0%? (since his step-up in basis gives him a basis equal to the contract principle) Have I totally missed the boat here? Thanks for all your time. The income from the installment sale is income in respect of a decedent. It did not get a stepped-up basis at the time of death. Your client, in effect, stepped into the shoes of his father and continued on with the installment sale. Your client should have been reporting the installment sale just like his father would have reported it if the father were still alive. There would be the interest portion of every payment, the return of basis portion of every payment, and the taxable gain portion of every payment. You will need to find out what the father had been reporting on his 6252. Then, look at the gain that should have been reported in 2006 and 2007. If the amount is minor, you might just report all gain this year, instead of amending the tax returns. Maribeth Quote Link to comment Share on other sites More sharing options...
jasdlm Posted February 9, 2009 Author Report Share Posted February 9, 2009 Thanks so much, Maribeth. I feel like a complete idiot. I really appreciate all the help you have given me. I had actually called a CPA who is a mentor to me, and she originally recommended the no 6252/interest only/step-up in basis route. I should have done more research at that time. (Not in any way trying to blame the CPA . . . she is a great mentor and friend.) I do think the gain will be relatively minor. This is a good lesson to me. Thanks again for all the time you have taken responding to my queries. I really appreciate it. Quote Link to comment Share on other sites More sharing options...
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