installment sale ended early

[JenMO]

Taxpayer is taking back land sold on installment sale. Sale was done in 2006. Purchaser is willingly signing back the property. How do I figure the basis for the original land owner and how does that affect the purchaser's figures. There was no depreciation. Could you amend the 2 tax returns and cancel the installment sale for the owner and the purchaser could consider the payment paid as rent? I read somewhere about tax tools worksheet on repos of real property and personal property. How can I get those? Any ideas? Thanks

[solomon]

If There Were

any payments received in 2007 it is a valid installment sale. See Reg. 1.453-5.

[JohnH]

Headache - Big Time

I did one of these last year that had me pulling my hair out, except mine was a commercial rental sold to a buyer who defaulted after 3 years and the seller had died in the interim. The repossessed property was held for a while as a rental and then sold for a gain a second time. Yours seems to be a little less confusing, but you need to work it through in order for the seller to be able to add the reported gain & any repossession expenses back to his basis. See IRC 1038 and Pub 537. There is a somewhat helpful worksheet in the publication.

To me, the whoe process made little sense until I finished it, then it all fell into place. I had to devise my own spreadsheets - nothing in my tax software even remotely helped me through this.

[Grumpy]

There is an XL spreadsheet available from:

http://groups.yahoo.com/group/TaxProExchange/messages

To get to the spreadsheet: go to "files", the click on those provided by Atticus.

[JohnH]

You're right

I was a member of the Yahoo group last year but was not familiar with the "files" feature then. Wish I had known more about accessing those spreadsheets at the time. Looks like Atticus did a great job with this one as well as the others. Thanks for pointing that out.

[George Boutwell]

From IRS Publication 537 (page 12)

Real Property

The rules for the repossession of real property allow you to keep essentially the same adjusted basis in the repossessed property you had before the original sale. You can recover this entire adjusted basis when you resell the property. This, in effect, cancels out the tax treatment that applied to you on the original sale and puts you in the same tax position you were in before that sale.

Therefore, the total payments you have received from the buyer on the original sale must be considered income to you. You report, as gain on the repossession, any part of the payments you have not yet included in income. These payments are amounts you previously treated as a return of your adjusted basis and excluded from income. However, the total gain you report is limited. See Limit on taxable gain, later.