121 Exclusion - Installment Sale

[JG EA]

Here is an interesting question. TP qualifies for the exclusion on sale of residence and makes that sale by an installment sale. If they get the house back by buyer default, does it make the exclusion invalid?

[Burke]

At first blush, I was going to say no, since the sale did not go through. But the contract did go through, perhaps he got a down payment?, it was the note retained by the seller which was defaulted on. Now, the interesting question to me is, if he resells it, will he meet the 121 rules (24 mos and all that). And, how long ago did this happen? Did he receive payments for several years, etc? Pub 537 on Installment Sales (Repossessions - page 11) refers to Reg 1.1038, if it was your main home prior to sale. This seems to indicate that if it is resold within one year from the date of repossession, the repo is disregarded. You need to read the whole thing for facts & circumstances.

[JG EA]

At first blush, I was going to say no, since the sale did not go through. But the contract did go through, perhaps he got a down payment?, it was the note retained by the seller which was defaulted on. Now, the interesting question to me is, if he resells it, will he meet the 121 rules (24 mos and all that). And, how long ago did this happen? Did he receive payments for several years, etc? Pub 537 on Installment Sales (Repossessions - page 11) refers to Reg 1.1038, if it was your main home prior to sale. This seems to indicate that if it is resold within one year from the date of repossession, the repo is disregarded. You need to read the whole thing for facts & circumstances.

Thanks, I saw in the pub that the gain is limited to your gross profit on the original sale. Since the gross profit is excluded I was hopeful that it would be zero. However, the reg. is just what I need. Now if I can just understand what the heck it is saying.