Repossession — Personal Property: Installment Sale Taxes (2025 IRS Guide)

This guide covers “Repossession — Personal Property” within installment sale taxes. The following material presents the IRS treatment of this topic, including the qualifications, exceptions, and examples in the source section. Read the rules alongside the facts of your own situation before deciding what to report, deduct, or document.

Adapted from Publication 537 (2025), Installment Sales, published by the Internal Revenue Service. This guide retains the source edition’s years, amounts, deadlines, and examples. It is guidance for that edition, not a statement that the same figures apply to every tax year.

Context for these rules

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. See Regulations section 1.1038-2 for further information.

The repossession rules apply whether or not title to the property was ever transferred to the buyer. It doesn’t matter how you repossess the property, whether you foreclose or the buyer voluntarily surrenders the property to you. However, it isn’t a repossession if the buyer puts the property up for sale and you repurchase it.

For the repossession rules to apply, the repossession must at least partially discharge (satisfy) the buyer’s installment obligation to you. The discharged obligation must be secured by the property you repossess. This requirement is met if the property is auctioned off after you foreclose and you apply the installment obligation to your bid price at the auction.

Repossession — Personal Property

If you repossess personal property, you may have a gain or a loss on the repossession. In some cases, you may also have a bad debt.

To figure your gain or loss, subtract the total of your basis in the installment obligation and any repossession expenses you have from the FMV of the property. If you receive anything from the buyer besides the repossessed property, add its value to the property’s FMV before making this calculation.

How you figure your basis in the installment obligation depends on whether or not you reported the original sale on the installment method. The method you used to report the original sale also affects the character of your gain or loss on the repossession.

Installment method not used to report original sale.

The following paragraphs explain how to figure your basis in the installment obligation and the character of any gain or loss if you didn’t use the installment method to report the gain on the original sale.

Basis in installment obligation.

If the issue price of the installment obligation is determined under Regulations section 1.1273-2 or Regulations section 1.1274-2, your basis will generally be the issue price of the obligation increased by any OID included in gross income and decreased by any payment other than a payment of qualified stated interest. Otherwise, your basis will be the amount realized attributable to the installment obligation increased by any unstated interest recognized in income under section 483 and decreased by any payment other than a payment of stated interest. If only part of the obligation is discharged by the repossession, figure your basis in only that part.

Gain or loss.

Add any repossession costs to your basis in the obligation. If the FMV of the property you repossess is more than this total, you have a gain. This is gain on the installment obligation, so it’s all ordinary income. If the FMV of the repossessed property is less than the total of your basis plus repossession costs, you have a loss. You included the full gain in income in the year of sale, so the loss is a bad debt. How you deduct the bad debt depends on whether you sold business or nonbusiness property in the original sale. See chapter 4 of Pub. 550 for information on nonbusiness bad debts and the instructions for your income tax return for information on business bad debts.

Installment method used to report original sale.

The following paragraphs explain how to figure your basis in the installment obligation and the character of any gain or loss if you used the installment method to report the gain on the original sale.

Basis in installment obligation.

Multiply the unpaid balance of your installment obligation by your gross profit percentage. Subtract that amount from the unpaid balance. The result is your basis in the installment obligation.

Gain or loss.

If the FMV of the repossessed property is more than the total of your basis in the obligation plus any repossession costs, you have a gain. If the FMV is less, you have a loss. Your gain or loss on the repossession is of the same character (capital or ordinary) as your gain on the original sale.

.Use Worksheet C to determine the taxable gain or loss on a repossession of personal property reported on the installment method. .

Worksheet C. Figuring Gain or Loss on Repossession of Personal Property

• Note: Use this worksheet only if you used the installment method to report the gain on the original sale.

Example.

You sold your piano for $1,500 in December 2024 for $300 down and $100 a month (plus interest). The payments began in January 2025. Your gross profit percentage is 40%. You reported the sale on the installment method on your 2024 income tax return. After the fourth monthly payment, the buyer defaulted on the contract (which has an unpaid balance of $800) and you’re forced to repossess the piano. The FMV of the piano on the date of repossession is $1,400. The legal costs of foreclosure and the expense of moving the piano back to your home total $75. You figure your gain on the repossession as illustrated in Example—Worksheet C.

Example— Worksheet C. Figuring Gain or Loss on Repossession of Personal Property

• Note: Use this worksheet only if you used the installment method to report the gain on the original sale.

Basis in repossessed property.

Your basis in repossessed personal property is its FMV at the time of the repossession.

FMV of repossessed property.

The FMV of repossessed property is a question of fact to be established in each case. If you bid for the property at a lawful public auction or judicial sale, its FMV is presumed to be the price it sells for, unless there’s clear and convincing evidence to the contrary.

Using the guidance

Keep the documents that establish the dates, amounts, and circumstances described above. References to other chapters, forms, worksheets, or earlier and later sections refer to the linked IRS publication. Check the full publication and its updates before relying on a rule for a different tax year or a situation not addressed here.

Sources and further reading

• Publication 537 (2025), Installment Sales: Repossession — Personal Property — Internal Revenue Service; 2025 edition.

The cited U.S. government text is in the public domain. Source accessed October 28, 2026. Fynoptic has organized this material for educational use and is independent of, and not endorsed by, the IRS.