Owner sells note ?

[cientax]

Have client that sold a house (not Principle residence) in 2006 and we have been reporting it on Form 6252 installment sale income. Now client sells the note to another individual. The original sale was for $76,000 and now they sold the note for $55,000. I've done this before a few years ago but I CANNOT remember how to report this. Can someone please help.

[jainen]

>>Now client sells the note <<

See page 11 of >Pub 537<

[samingeorgia]

OK, as I read it, it seems that the disposition of the note represents a change in the gain or loss on the original sale. Does that mean that I need to recompute the gain percentage in the year the note is disposed of to reflect the ultimate gain on the sale? What is interesting is that if the original sale resulted in ordinary income, the adjustment to gain or loss is ordinary also. So apparently the note is not a capital asset in the traditional sense, because you don't have basis in the note unless gain is recognized and the nature of that gain remains unchanged whether the note is collected or sold.

[jainen]

>>you don't have basis in the note unless gain is recognized and the nature of that gain remains unchanged whether the note is collected or sold<<

According to what I linked, "Figure your basis in an installment obligation by multiplying the unpaid balance on the obligation by your gross profit percentage. Subtract that amount from the unpaid balance. The result is your basis in the installment obligation." You then use that basis to determine gain or loss on the sale of the note.

All this only applies when you are reporting under the installment method. If you acquire the note by purchase or you are not using the installment method, the note would be treated as a separate capital asset.

[samingeorgia]

Got it. Thanks for the clarification of my poorly-worded sentence.