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

This guide covers “Repossession — Real 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 — Real Property

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.

As a result, the total payments you’ve received from the buyer on the original sale must be considered income to you. You report, as gain on the repossession, any part of the payments you haven’t yet included in income. These payments are amounts you previously treated as a return of your adjusted basis and excluded from income. However, the total gain you report is limited. See Limit on taxable gain, later.

Mandatory rules.

The rules concerning basis and gain on repossessed real property are mandatory. You must use them to figure your basis in the repossessed real property and your gain on the repossession. They apply whether or not you reported the sale on the installment method. However, they apply only if all of the following conditions are met.

1. The repossession must be to protect your security rights in the property.

2. The installment obligation that is satisfied by the repossession must have been received in the original sale.

3. You can’t pay any additional consideration to the buyer to get your property back unless either of the situations listed below applies.

   1. The requisition and payment of the additional consideration were provided for in the original contract of sale.

   2. The buyer has defaulted, or default is imminent.

Additional consideration includes money and other property you pay or transfer to the buyer. For example, additional consideration is paid if you reacquire the property subject to a debt that arose after the original sale.

Conditions not met.

If any one of these three conditions isn’t met, use the rules discussed under Personal Property, earlier, as if the property you repossess were personal rather than real property. Don’t use the rules for real property.

Figuring gain on repossession.

Your gain on repossession is the difference between the following amounts.

• The total payments received, or considered received, on the sale.

• The total gain already reported as income.

See the earlier discussions under Payments Received or Considered Received for items considered payment on the sale.

Limit on taxable gain.

Taxable gain is limited to your gross profit on the original sale minus the sum of the following amounts.

• The gain on the sale you reported as income before the repossession.

• Your repossession costs.

This method of figuring taxable gain, in essence, treats all payments received on the sale as income but limits your total taxable gain to the gross profit you originally expected on the sale.

Indefinite selling price.

The limit on taxable gain doesn’t apply if the selling price is indefinite and can’t be determined at the time of repossession. For example, a selling price stated as a percentage of the profits to be realized from the buyer’s development of the property is an indefinite selling price.

Character of gain.

The taxable gain on repossession is ordinary income or capital gain, the same as the gain on the original sale. However, if you didn’t report the sale on the installment method, the gain is ordinary income.

Repossession costs.

Your repossession costs include money or property you pay to reacquire the real property. This includes amounts paid to the buyer of the property, as well as amounts paid to others for such items as those listed below.

• Court costs and legal fees.

• Publishing, acquiring, filing, or recording of title.

• Lien clearance.

Repossession costs don’t include the FMV of the buyer’s obligations to you that are secured by the real property or the costs of reacquiring those obligations.

.Use Worksheet D to determine the taxable gain on a repossession of real property reported on the installment method. .

Worksheet D. Taxable Gain on Repossession of Real Property

• Note: Use this worksheet to determine taxable gain on the repossession of real property if you used the installment method to report the gain on the original sale.

Example.

You sold a tract of land in January 2023 for $25,000. You accepted a $5,000 down payment, plus a $20,000 mortgage secured by the property and payable at the rate of $4,000 annually plus interest (9.5%). The payments began on January 3, 2024. Your adjusted basis in the property was $19,000 and you reported the transaction as an installment sale. Your selling expenses were $1,000. You figured your gross profit as follows.

For this sale, the contract price equals the selling price. The gross profit percentage is 20% ($5,000 gross profit ÷ $25,000 contract price).

In 2023, you included $1,000 in income (20% (0.20) × $5,000 down payment). In 2024, you reported a profit of $800 (20% (0.20) × $4,000 annual installment). In 2025, the buyer defaulted and you repossessed the property. You paid $500 in legal fees to get the property back. Your taxable gain on the repossession is figured as illustrated in Example—Worksheet D.

Example— Worksheet D. Taxable Gain on Repossession of Real Property

• Note: Use this worksheet to determine taxable gain on the repossession of real property if you used the installment method to report the gain on the original sale.

Basis.

Your basis in the repossessed property is determined as of the date of repossession. It’s the sum of the following amounts.

• Your adjusted basis in the installment obligation.

• Your repossession costs.

• Your taxable gain on the repossession.

To figure your adjusted basis in the installment obligation at the time of repossession, multiply the unpaid balance by the gross profit percentage. Subtract that amount from the unpaid balance.

.Use Worksheet E to determine the basis of real property repossessed..

Worksheet E. Basis of Repossessed Real Property

• Note: Use this worksheet to determine your basis in the repossessed real property.

Example.

Assume the same facts as in the previous example. The unpaid balance of the installment obligation (the $20,000 note) is $16,000 at the time of repossession because the buyer made a $4,000 payment. The gross profit percentage on the original sale was 20%. Therefore, $3,200 (20% (0.20) × $16,000 still due on the note) is unrealized profit. You figure your basis in the repossessed property as illustrated in Example—Worksheet E.

Example— Worksheet E. Basis of Repossessed Real Property

• Note: Use this worksheet to determine your basis in the repossessed real property.

Holding period for resales.

If you resell the repossessed property, the resale may result in a capital gain or loss. To figure whether the gain or loss is long term or short term, your holding period includes the period you owned the property before the original sale plus the period after the repossession. It doesn’t include the period the buyer owned the property.

If the buyer made improvements to the reacquired property, the holding period for these improvements begins on the day after the date of repossession.

Bad debt.

If you repossess real property under these rules, you can’t take a bad debt deduction for any part of the buyer’s installment obligation. This is true even if the obligation isn’t fully satisfied by the repossession.

If you took a bad debt deduction before the tax year of repossession, you’re considered to have recovered the bad debt when you repossess the property. You must report the bad debt deduction taken in the earlier year as income in the year of repossession. However, if any part of the earlier deduction didn’t reduce your tax, you don’t have to report that part as income. Your adjusted basis in the installment obligation is increased by the amount you report as income from recovering the bad debt.

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 — Real 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.