if real property is sold under the installment method and later repossessed, the seller must recognize gain to the extent that the amount received before the repo exceeds the gain already reported as income (IRC 1038) the repossession gain is limited to the initial gain on the sale reduced by the gain already reported as income and any repossession costs.
put another way say gross profit is $80,000 and gross profit is 30%
you receive $100,000 before repo. you've reported $30,000 of profit in previous years
you would have a repo gain of $50,000
the basis in the repossessed property equals the adjusted basis of the debt at the time of repossession plus any repossession gain recognized, plus any repossession costs. the repossession gain retains the same character as the profit from the original sale
so if the sales price of the repo'd property is less than the adjusted basis you get to take the loss. the sale should flow to form 4797 part 1
example
1) sales price $200,000
2) gross profit % 40 (basis $120,000)
3) payments received before default $10,000
4) gross profit reported $4,000
5) excess payments received over gain reported (line 3- line 4) $6,000
6) gross profit on sale $200,000 - $120,000 = $80,000
7) prior gains reported line 4 = $4,000
😎 repo costs $5,000
9) total 8 + 9 = $9,000
10 line 6 less line 9 = $71,000
11) taxable gain lesser of 5 or 10 $6,000
12) unpaid balance $200,000 - $10000 = $190,000
13 less unrealized profit $190,000 X 40% = $76,000
14) basis on date of repo $120,000 -$6, 000 = $114,000
15) taxable gain $6,000
16) repo costs $5,000
17 basis lines 14+15+16 = $125,000
gain reported before repo $4,000
taxable gain on repo $10,000 - 4000 = $6000
original basis $120,000
principal recovered $10,000- 4000= 6000
preliminary basis $120,000 - 6000 = $114,000
principal recovered that must be reported as gain $6,000
repoo coats $5000
thus total basis = $125,000
another example
1) $200
2) $140
3) $150
4) $45
5) $105
6) $60
7) $45
😎 0
9) $45
10) $15
11) $15
12) $50
13) $15
14) $35
15) $15
16) 0
17 $50
