Exchanged into upleg property in 2015. Sold property using Land Contract in2016. Purchaser defaulted in 2019 and abandoned Land Contract. In 2016, 2017, 2018, I did not take any depreciation expense on property. Selling property in 2020. I want to exchange into another real estqte investment. How do I structure this convoluted mess?
land contract is similar to other forms of installment sales in the eyes of the IRS being that the property is considered "sold" in the year the contract is entered into. Because of this, Section 1250 recapture (depreciation recapture) is owed in full in the year the contract is entered into (the year of the sale). Section 1250 recapture cannot be deferred via installment sales.
The IRS views it as a sale in the year the contract is entered in to. since it is considered sold, not taking depreciation is proper.
since it was in effect an installment sale it did not qualify for 1031. under IRC section 1038, you must recognize gain to the extent that amounts received before repossession exceeds the gain already reported as income. this gain is limited to the initial gain on sale reduced by the gain already reported. as income and any repossession costs.
1) principal payments received before repossession
2) gain reported
3) line 1 less line 2
4) gross profit on the sale
5) prior gain reported (usually the same as line 2)
6) repossession costs
7) line 5+6
😎 line 4 less line 7
9) taxable gain (lesser of line 3 or 😎
10) unpaid balance of the obligation
11) unrealized profit on line 10
12) line 10 minus 11 (adjusted basis on the date of repossession)
13) line 9
14) line 6
15) line 13 minus line 14
16) line 12 + line 15. (basis in the property).
don't think TT can handle this so I would suggest using a pro.
