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R. Klein, EA
R. Klein, EA, Accountant
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Sold some vacant land, owner financed. Buyer made payments

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Sold some vacant land, owner financed. Buyer made payments regularly for several years and then defaulted. I foreclosed on the property and it was sold at sheriff's sale, where I bought it back. Can I deduct the attorney fees incurred during the foreclosure?

fastfile : Thank you for your question.
fastfile : You have several different transactions.
fastfile : First, you have an installment sale of the original transaction.
fastfile : Your foreclosure and legal fees associated with it are related to that transaction. Legal fees are deductible.
fastfile : When you re-purchased the property at the auction, you now have a "new" property with a new basis starting with the amount you paid at the auction.
fastfile : Any expenses prior to that purchase relate to the seller-financed transaction only.
Customer: I assume the deduction is made on Schedule A. Is that correct?
fastfile : That is a bad assumption.
fastfile : The legal fees are part of the selling transaction and the final disposition of that property.
Customer: So are you saying that I add the attorney fees to the cost of the property to me when I repurchased it at sheriff's sale?
fastfile : That is exactly what I did not say.
fastfile : Consider the property to be two different properties you bought.
fastfile : The original property you "attempted" to sell on a seller financing agreement
fastfile : and the second is a property you bought at auction.
fastfile : Even though it is the same address.
fastfile : The second property has a brand new cost-basis of whatever you paid at the sheriff sale. No other costs are associated with this new property.
fastfile : All other costs relate to the Old or original property
fastfile : As for the sale of the first property, as an example, let's say you agreed to sell for $100K, and you received $10K down and $5K in principal before the foreclosure. At the auction, you bought the property for $50K.
fastfile : As for the sale of the OLD property, your total received was $10+5+50 = $65K rather than $100K. You base your gain or loss on this actual amount received. Your costs include the original cost of the house, plus any legal and collection costs.
fastfile : Your NEW property was bought for $50K, so that is the new basis of the NEW property.
Customer: I believeThe amount of calculated gain each past year has been carried forward to Schedule D. This year there was one payment made and the amount of calculated gain was carried forward from the 6252 to the Schedule D. How do I make an entry on Schedule D this year to account for the change in basis for the attorney fees?
fastfile : Schedule D is not where installment sales are reported. Installment sales are supposed to be reported on Form 6252 unless you elected to report the entire profit on Schedule D in the first year.
fastfile : Per QuickFinder: "If real property is sold under the installment method and later repossessed, the seller must recognize the gain (or loss) to the extent that the amount received before the repossession exceeds the gain already reported as income."
fastfile : The basis in the real property is adjusted, as described above, at the time of repossession, plus any repossession costs.
fastfile : Whatever the adjusted gain or loss since the prior year will be reported as the same type of gain or loss as the prior gain or loss (short-term/long-term/ordinary)
fastfile : Essentially, you will end up with an adjusting gain or loss figure for the current tax year based on the difference between the final gain and loss and any previously reported gain or loss.

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