Professional · Altoona, PA · Member since 2010 · 72 posts · 23 votes
I have buyers who are turning in keys to me on a property after 3 years into an installment sale, thus terminating the agreement. If I resale the house outright how will I be taxed on the gains. Can I claim long-term capital gains taxes?
1. You have an installment sale that you have been (should have been) recognizing income on for the last 3 years (interest income + gain % of the installment payments). The gain percentage you should have been recognizing over the last three years is under the assumption that the installment sale would be completed in full and you receiving the entire sales price agreed upon. There is a calculation to determine the gain (or loss) on the repossessed property.
This link seems to have some good explanations. Look under real property.
2. I'm not positive off the top of my head, but I would think since you have technically sold the property when you did the installment agreement, if you repossess it now and the property is back in your name and you sell it immediately that would be Short Term Capital Gain....I'm not 100% on this though.
You really need to meet with a local CPA so he/she can look at your entire picture and determine what is best for you.
What you are dealing with, as far as IRS is concerned, is a repossession. It doesn't matter how you get the property back, whether you foreclose or the buyer voluntarily surrenders the property to you. (It is not a repossession if the buyer puts the property up for sale and you repurchase it.)
You will keep essentially the same adjusted basis in the repossessed property you had before the sale. You can recover this entire basis when you resell the property. So this, in effect, cancels out the tax treatment you used on the original sale. Accordingly, ALL the payments that you received under the contract have to be considered income. As part of the gain on repossession you will have to report any amount of the payments you haven't yet included in your income.
When you resell the repossessed property you may have a gain or loss. To figure whether the gain or loss is long-term or short-term, your holding period includes the period you owned the property before the original sale plus the period after the repossession. It does not include the period the buyer owned the property.