Hi and welcome to our site!The imputed income in this situation would be the mortgage financing to the purchaser - if the mortgage note has no interest charges.Let analyze the sequence of events.1. the taxpayer buys land for $45,000 - there is no taxable income2. holds land for 10 years - there is no taxable event either.3. sells land for $2,700,000 in a no-money-down deal, taking back a $2.7 million purchase money mortgage - the sale transaction must be reported in the year of sale, but the taxpayer may choose installment method - so with no money down - there will not be taxable income. However forgone interest will be the imputed income in the year of the sale and following years.4. gets no payments - there will be imputed income all these three years for the forgone interest on the mortgage.5. and then forecloses on mortgage three years after - that will be repossession. If you repossess your property after making an installment sale, you must figure the following amounts.--Your gain (or loss) on the repossession.--Your basis in the repossessed property.Depending on the fair market value of the property received in repossession - there might be a gain or a loss. Correspondingly - the basis on the foreclosed property will be determined.If the value of the property is the same as it was three years ago when the property was sold - there will not be any gain on repossession and the basis will be the same as the basis when it was originally sold.6. bidding in the property with $2.7 million bid - there is no bidding when the property is foreclosed. The owner may sell the property AFTER it is repossessed in foreclosure procedure - and may sell it again to the higher bidder - but that will be another sale transaction.
So, you are saying there is some imputed income, right?
Yes - for forgone interest on the mortgage.
I am interested in the last part of your answer, the last transaction where Taxpayer “repossesses” the land at a mortgage foreclosure sale. I am focusing on your meaning of “repossess.”
I believe you are incorrect when you wrote, at line 6 “there is no bidding at a foreclosure.”
This is not a case where the Purchaser and the Seller (Taxpayer) agree that Purchaser will voluntarily surrender the land back to Seller Taxpayer in lieu of foreclosure (i.e., repossession in lieu of foreclosure). In that case, there would be no bidding.
This is situation where property is judicially sold at public auction on the courthouse steps to the highest bidder, and Taxpayer makes the winning $2.7 million bid. Taxpayer receives a foreclosure deed showing purchase price of $2.7 million. All foreclosure deeds are subject to states’ statutory redemption statute (all states have redemption statutes). In order to redeem from a foreclosure sale, the purchaser would have to pay $2.7 million actual cash (plus statutory interest that all states have) to Taxpayer.
My thinking is that Taxpayer’s $2.7 million “bid” at a public sale is actually a $2.7 million imputed “payment” to Purchaser (i.e. a forced buy back of the land), coupled with imputed $2.7 million “payment” by purchaser to Seller Taxpayer (i.e., a $2.7 million pay-off of the mortgage). My thinking is that Taxpayer derives $2.7 million in “phantom income” at the time he bids $2.7 million. He would get a new basis in the property ($2.7 million) but would have to pay taxes (whether regular income or long term capital gains) on the $2.7 million “phantom income.”
By bidding $2.7 million at the public sale, Taxpayer certainly loses the opportunity to receive less (say maybe $2.6 million) from some unrelated third party. I’m pretty sure that if an unrelated third party had bid and paid $2.6 million at the foreclosure sale, Taxpayer would have to report $2.6 million in income (maybe ordinary income if he is a developer in business of buying and selling real estate or maybe capital gains if he is just ordinary person).
Your answer at 5 may be saying the same thing from a different angle, if I understand what you are saying in line 5.
Does “you must figure Your gain (or loss) on the repossession” mean that you figure your gain by subtracting $45,000 from $2.7 million or that you figure your gain by subtracting $2.7 million from $2.7 million?
Thanks for your info, Lev:
If you can give me the relevant IRS publication number, we will be finished with this question
Thanks for providing excellent service.