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Lev, Tax Advisor
Category: Tax
Satisfied Customers: 29658
Experience:  Taxes, Immigration, Labor Relations
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Does the IRS impute income where Taxpayer:(1) buys land

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Does the IRS impute income where Taxpayer:

(1) buys land for $45,000, holds land for 10 years, then sells land for $2,700,000 in a no-money-down deal, taking back a $2.7 million purchase money mortgage,

gets no payment,

and then

(2) forecloses on mortgage three years after selling it, bidding in the property with $2.7 million bid.

Lev :

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 income
2. 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?

Lev :

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?

Again - the original sale transaction must be reported.
In order for the property to be put on the sale - the property must be repossessed and the mortgage holder must take the ownership on that property back.
Then - after that - the property may be put on sale.
When the mortgage holder is bidding on the collateral property - he is "kind of" purchasing the property from himself - so that is NOT the actual sale transaction.
In this case - we may not say that the mortgage holder has a gain or a loss based on the bidding amount..
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.
The rules for figuring these amounts depend on the kind of property you repossess. The rules for repossessions of personal property differ from those for real property. Special rules may apply if you repossess property that was your main home before the 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.

Taxable Gain on Repossession of Real Property is calculated using following worksheet:
1. Enter the total of all payments received or treated as received before repossession . . .
2. Enter the total gain already reported as income . . . . . . . . . .
3. Subtract line 2 from line 1. This is your gain on the repossession . . . . . . .
4. Enter your gross profit on the original sale . . . . . . . . . . . . . . .
5. Enter your costs of repossessing the property . . . . . . . . . . .
6. Add line 2 and line 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7. Subtract line 6 from line 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . ..
8. Enter the lesser of line 3 or line 7. This is your taxable gain on the repossession . . . . . .
Customer: replied 3 years ago.

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.



Hi John appreciate your warm words,
The key point in your situation - is the original sale transaction.
An installment sale is a sale of property where at least one payment is to be received after the tax year in which the sale occurs. You are required to report gain on an installment sale under the installment method unless you “elect out” on or before the due date for filing your tax return (including extensions) for the year of the sale. You may “elect out” by reporting all the gain as income in the year of the sale
Your total gain on an installment method is generally the amount by which the selling price of the property you sold exceeds your adjusted basis in that property. The selling price includes the money and the fair market value of property you received for the sale of the property, any selling expenses, and existing debt encumbering the property that the buyer assumes or takes subject to.

Under the installment method, you include in income each year only part of the gain you receive, or are considered to have received. Use Form 6252, Installment Sale Income, to report an installment sale in the year the sale occurs and for each year you receive an installment payment.
Here is the form -
and instructions -

The IRS publication which addresses all reporting is here -‎
Specifically for repossession reporting - see page 12 - but we need to use rules related to real property - started from page 13
on page 14 - see two worksheets
Worksheet E - Basis of Repossessed Real Property
Worksheet D - Taxable Gain on Repossession of Real Property

I hope that helps.
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