When you, as a seller, repossess realty on the buyer’s default of a debt that the realty secures, you may realize gain or loss. (If the realty was a personal residence, the loss is not deductible.) A debt is secured by real property whenever you have the right to take title or possession or both in the event the buyer defaults on his or her obligation under the contract.
Gain on the repossession is the excess of: (1) payments received on the original sales contract prior to and on the repossession, including payments made by the buyer for your benefit to another party, over (2) the amount of taxable gain previously reported prior to the repossession.
Gain computed under these two steps may not be fully taxable. Taxable gain is limited to (1) the amount of original profit less gain on the sale already reported as income for periods prior to the repossession, plus (2) your repossession costs.
The limitation on ...