Today TaxMama hears from Mike in Colorado who can’t find an answer. “IRS Publication 537 has a section describing how to calculate a gain, and your new basis, when you repossess real estate. But all the examples, and the instructions describe how to make these calculations when you originally reported the sale using the installment sale method. What if you reported the entire gain when the property was sold, not using the installment sale method?”
Dear Mike,
That’s an excellent question. If you have reported the entire gain, you have two options:
Option 1) Amend the original tax return, if the amendment period is still open in the statues (three years after the return was filed), and reverse the sale. This will generate a refund for the capital gains taxes you originally paid.
In addition, your basis will be increased by all the non-deductible selling costs at the time. Also, remember to increase your basis by costs to repossess the property. You will undoubtedly also have repair costs. There usually are, when a property has to be repossessed. Add those to basis if this is a personal or investment property. Deduct them as repair costs if this is to be a rental.
Option 2) You would use this option if the original sale is out of statute, or you don’t want to open up the original return for audit. When you sold the property, you increased the basis to the sales price. Use that as your starting point. Add in the costs to repossess and repair the property, as explained in Option 1.
Remember to issue a Form 1099-C to the buyer for the cancellation of debt.
https://www.irs.gov/pub/irs-pdf/f1099c.pdf
Incidentally, TaxTools has a calculator for repossessions of real property. Call them and see if this will help you. https://www.taxtools.com/products_tt.aspx
Good luck!
No doubt, we will be hearing from our Tax Pros with additional advice. So please keep checking the comments on today’s TaxQuip.
And remember, you can find answers to all kinds of questions about foreclosures, repossessions and other tax issues, free. Where? Where else? At TaxMama.com.
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- IRS Form 1099-C :: Cancellation of Debt
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