Seller/Finance held deed default

[hleon]

On seller finance held deed, the buyer defaulted on his payment.  In 2024, Seller incurred legal fees expenses as well as real estate taxes.  Where and how does CX record the expenses on his 2024 tax return?  or Can seller add the expenses to the basis and capitalize it in the future? Which is more advantageous to the customer?

[DianeW777]

A repossession is considered a sale for tax purposes. Review the worksheet for repossessions to determine your selling price and your cost basis for the sale. A loss would not be allowed if this was a primary residence before the sale. It will be reported based on whether this was personal property or business property.

If a taxpayer does not make payments owed on a loan secured by property, the lender may foreclose on the loan or repossess the property. The foreclosure or repossession is treated as a sale from which the taxpayer may realize gain or loss. This is true even if the taxpayer voluntarily returns the property to the lender.

There is no place on a tax return that is labeled 'Gain on Repossession'.  It is reported as though it were a sale and using your details. I would advise to enter a description of the property as Repossession and you can use Various for the dates of purchase and sale, then select the holding period. However, using dates that represent the purchase and sale, if applicable will produce the same result.

If you did not receive any installment payments or interest from the installment sale in 2024, you can delete your Form 6252 by using the following steps.  

• Open your tax return > Use the Search box (upper right) > Type installment sales (plural) > Press enter > Select the Jump to... link
• Click the delete button or the trash can depending on your TurboTax version (Online or Desktop).

If you did have any payment activity, you should leave the installment sale and delete it next year.

Basis in installment obligation.   Your basis is figured on the obligation's full face value or its FMV at the time of the original sale, whichever you used to figure your gain or loss in the year of sale. From this amount, subtract all payments of principal you have received on the obligation. The result is your basis in the installment obligation. If only part of the obligation is discharged by the repossession, figure your basis in only that part 

 For information about determining the actual gain on the repossession IRS Publication 4681 will provide the details.

• The gain is the difference between the amount realized and the adjusted basis of the transferred property (amount realized minus adjusted basis). The loss is the difference between the adjusted basis in the transferred property and the amount realized (adjusted basis minus amount realized). 
• When a residence that is security for a mortgage is abandoned or foreclosed upon, the gain or loss must be reported on the return and is subject to the rules for a Sale of Residence unless it is business property. 
• See IRS Publication 4681 (page 13 - also included in the link above).

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