How do I handle a Deed in lieu of Foreclosure, on a house that I resold in the same year?

[Fpslms]

The house was returned to us in June  2016 on a Deed in lieu of Foreclosure.  We remodeled the house and sold it in December 2016.  How do I account for the Remaining Balance on the First Sale, and the New Seller Financed Loan, on the same house in the same year?

[Carl]

This is not an answer, but just FYI to get your thinking on track. I'm waiting for someone more knowledable in seller financed sales to jump in here. But here goes............
What "remaining balance" on the first sale? Assuming you sold it for let's say, $100,000, did you physically give the buyer that amount? I don't think so. I think that you agreed to sell the house for lets say, $100,000 and after the buyer paid (for the sake of argument) $20,000, they realized they could not afford the house, so deeded it back to you. So you have lost nothing, and gained $20,000 that you did not refund to the buyer when they elected to deed it back to you in lieu of foreclosure. It's "as if" you rented the house out for that period of time. New we wait for someone that can actually answer your question, while I research it.

[Fpslms]

Carl, the Buyer paid $3,500 down on a $23,500 house.  Loan = $20,000.  Balance when recovered was $14, 615.  We spent $15,000 Remodeling, and then sold in December for $39,000 Seller Financed.  Original BASIS was Depreciated to ZERO, prior to Original Sale.  F - Y - I

[Carl]

Couple of questions, but one at a time so I can keep my head straight. Done a bit of research on this, and "had" what I believed to be a useful response. But now you've raised eyebrows here.
1. How can you reduce original basis at time of sale to zero? Assuming you paid $23,500 for the house when you originally bought it, then spent $15,000 on qualified property improvements, that makes your adjusted cost basis at the time you sold it, $38,500.
2. What is "loan = $20,000". Is this a loan "you" have and that "you" are paying back to the original mortgage holder on the property? I'm talking about "your" mortgage lender. Is the "Balance when recovered" amount of $14,615 what "you" owe to "your" mortgage lender?
My head's spinning. 🙂

[Fpslms]

Sorry for the confusion, Carl.  

We operated the house as a Rental for over 30 Years, prior to the sale.  It had Depreciated to ZERO.  

The Original Buyer paid $3,500 DOWN, and we carried the Balance of $20,000.  WE NEVER HAD A MORTGAGE LENDER TO US.  The $14, 615 is what the Original Buyer owed US, when they Defaulted.  

I now have the house I sold in 2012, plus the same house that closes next Monday, Both on my 2016 TurboTax.  

So far I gave the Second Selling of the house a slightly different Name, just to keep them separated.

[Carl]

Ah okay. It's the use of the terminology that can that be misleading. Your cost basis didn't reduce to zero. You "depreciated" the property to zero, meaning that your cost basis for the sale is the value of the land only, since you can't depreciate land. Your cost basis on the structure is zero, but your cost basis on "the property" is the value of the land. So what is that?
@TaxGuyBill now that there's more clarity here.........HHEEEEELLLLPPPPP!!!!!!

[Fpslms]

Confusion seems to be the Understatement here.  I can see that our Purchase of the house in 1984, & the Sale to our Original Buyer in 2012, have gotten mixed up.

We paid $15,236 for the house in 1984.  Building = $10,665      Land = $4,570      70/30 Split

We sold it in 2012 for $23,500, and did a Seller Financed Loan in the amount of $20,000.

The house was returned to us in June of 2016 on a Deed in lieu of Foreclosure, with an Unpaid Balance of $14,615.

We just sold it this month for $39,000, following a $15,000 Remodel.  The New Owner paid $8,300 Down and we are doing a Seller Financed Loan in the amount of $30,700 for Ten Years.

I think that covers everything.

Just trying to figure out how to handle BOTH SALES in TurboTax, and where to enter the data.  Do they Blend together, or handled as Two Separate Transactions?

Thank you for any assistance and direction you may offer.

[TaxGuyBill]

The short answer is that it may be easiest to go to a tax professional this year.   🙂

Before I give the long answer, I need to know this:  Did you report the first sale as an Installment Sale, and you were reporting the payments each year on Form 6252?  Or did you report the full sale and pay taxes on it in 2012?

[Fpslms]

YES...It was reported as an Installment Sale, and reported yearly on Form 6252.

...& I understand the possible need of a Tax Professional for this year.

[Fpslms]

WOW!!!  Outstanding!!!  Thank You!!!               Where do I mark "Recommended"?

[TaxGuyBill]

I originally enter it as a "comment", but just change it to an "answer" that you can 'vote' on or "recommend".

[Carl]

Comment deleted. I see TG Bill is already on top of it. thanks TG Bill!

[TaxGuyBill · Accepted solution]

If you received any payments from the First Sale, report it as usual on Form 6252.

Your Basis in property (land) is $4,570 (assuming you didn't have any other improvements).
You sold it for $23,500 and received $8885 in payments.
For the prior years, you should have been reporting 19.45% of the payments as non-taxable ($4570 divided by $23,500).
That means that of the $8885 you received, $1728 was non-taxable, and $7157 was taxable.
The $1728 now becomes taxable.  Well, actually it's $1728 *MINUS* any Repossession Costs (see link for details).
https://www.irs.gov/publications/p537/ar02.html#en_US_2015_publink1000221753

I would enter it in the section where you enter a Stock Sale, or as a Second Home, and call it "Repossession of Real Property".  Sale price $1728 (minus any repossession costs), Basis $0.  Or you could base it on actual amounts, using Sale Price of $8885 and basis of $7157.  It really doesn't matter much.

That now returns your house to the pre-sale Basis of $4,570.

Take that $4,570 and add your $15,000 remodel, and that is the basis for the Second Sale.

Sell the second house using those numbers.  You can probably just enter "Installment Sale" in the "Find" search box and it will bring you there.