§1038 Certain reacquisitions of real property

Summary

When a seller takes back real property because the buyer’s debt secured by that property wasn’t paid, the seller may have to report a taxable gain. The gain equals the money and fair market value of other things the seller got from the sale before getting the property back (not counting the buyer’s own promises to pay), minus any gain the seller already reported from that sale. For reacquisitions in any taxable year beginning after the date of the enactment of this section, the reported gain cannot be more than the sale price minus the property’s adjusted basis, reduced by any gain already reported and by the money or other property the seller paid to get the property back. Except as this rule says otherwise, that gain must be recognized for tax purposes. After the seller reacquires the property, its tax basis becomes the adjusted basis of the debt that was secured by the property (as of the reacquisition date), plus the gain just figured and plus the amount the seller paid to reacquire the property. If the seller had already written off some or all of the debt as worthless before getting the property back, the seller is treated as having received that written‑off amount at reacquisition, and the debt’s basis is increased by that amount. Under Treasury rules, if an installment note is the seller’s debt and meets the rule in section 691(a)(4)(B), then a taxpayer who receives property in exchange is treated as if the seller reacquired it, and the taxpayer’s basis is increased by the deduction that would have been allowed under section 691(c).