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Under the installment method, you included in income each year only part of the gain you received, or were considered to have received.
In general, interest should be charged on an installment sale - so part of payments were allocated to the interest and part to principal payments.
As the property was repossessed after making an installment sale, you must figure the following amounts.
You report gain or loss from a repossession on the same form you used to report the original sale. The rules for the repossession of real property allow you to keep essentially the same adjusted basis in the repossessed property you had before the original sale. You can recover this entire adjusted basis when you resell the property. This, in effect, cancels out the tax treatment that applied to you on the original sale and puts you in the same tax position you were in before that sale.
Therefore, the total payments you have received from the buyer on the original sale must be considered income to you. You report, as gain on the repossession, any part of the payments you have not yet included in income. These payments are amounts you previously treated as a return of your adjusted basis and excluded from income.
Use Worksheet D to determine the taxable gain on a repossession of real property reported on the installment method. - that may be found in the IRS publication 537 page 13 - http://www.irs.gov/pub/irs-pdf/p537.pdf
Also Use Worksheet E to determine the basis of real property repossessed. - that may be found in the same publication page 14.
If you sell the property again - that basis (adjusted by qualified expenses) will be used to calculate your capital gain. Please provide the information above to your tax preparer.