Hi Steve and welcome to our site!I would report such transaction as a sale at the fair market value - because it was the disposition of the property you legally own after the purchase contract was completed..Assuming - your purchase price is equal to the appraised value of $1.2 mil. - that is your basis. you need to allocate the basis between each item - and assuming that the basis of assets you are returning to the seller is $235k - you will record the sale as $235k (selling price) MINUS $235k (basis) - and your gain/loss will be zero - so there would not be any tax liability.
I received no money so how can I not have a loss?
You may not claim a loss if you just giving away a property... I thought that the part of the purchase price were refunded and that would be logical...In this case you original purchase should be re-evaluated - and that transaction should be treated as a addendum to the purchase contract. That means - you purchased for $1.2 mil. only the property which were not returned. and the basis should not be assigned to returned assets.If you received no money - nothing is reported on your tax return.