Not sure how to handle this from the IRS standpoint. Had to foreclose on the first (and second) now hold the Deed of Trust and am going to use this property as a rental.
Did I exchange my first mortgage for this deed of trust (1031?) which now will be a rental...or...how does the IRS view this transaction?
The IRS first viewed the transaction as an installment sale. I presume that you reported the installment sale on your tax return and paid the appropriate taxes.
When your buyer defaulted and you regained possession of the property, the IRS will treat the re-acquisition of your property as a repossession of seller financed property.
You sold the property and presumably received some installment payments. In addition to the payments you received, you also have the property. You have a taxable gain as a result of the repossession. Presumably, some of your installment profit has already been taxed, so will have to calculate a new cost basis for the propety you re-acquired.
All the formulas you need to calculate your gain and cost basis are found in Section 1038 of the tax code. Have your CPA review Section 1038 of the tax code with you and compute both your repossession gain and your new cost basis as well as your depreciation basis.
You may not have any tax on your repossession gain If your installment sale qualified for the section 121 capital gains exclusion. Again, your CPA will help you figure all that out.
[ Edited by NewKidInTown3 on Date 01/05/2008 ]
Really appreciate your feedback! Yes, have done all the appropriate installment payments and have been taxed accordingly. Will look at 1038. I have been paying taxes (through Quicken) for years and am trying to make the appropriate entries in the program. Will also look at section 121. Thanks.
Somehow since reading your post I haven't been able to focus on real estate- my mind keeps drifting off to a trip I took as a teenager, hitchhiking from the SF bay area to Port Angeles and spending a couple of weeks at Olympic Hot Springs, taking long hikes through the rain forest and generally having a great time.
I'm wondering if it is still the same as it was 33 years ago??
Chris
Chris
That does bring back memories. Way back in ’72 I hitch hiked to Alaska for the summer. Then rode my thumb back down “the” highway, over to Vancover, to Washington, CA, AZ, NM, Tx and back to MO so I could get back to college in KY. Them were the days 
Somehow the "loggerland" screen name makes me think those forests may not be quite the way I remember then...
Chris
We traveled the country (since retiring from a school district in Colorado Springs, CO) from the East and Gulf Coasts to the great Northwest for eight years...and decided this was where we wanted to live. We have lived here for three years now...don't know what it was like in Chris' teenage yrs or...but it sure is pretty now. We live on a five acre piece, pond, view of the mountains and about one mile from the San Juan straits...lots of magnificient trees...(those that haven't blown down from recent winds). BTW thanks for your knowledgeable input as to my foreclosure and rental situation. Austin
Once Newkid puts in his two cents, there generally isn't much left to say...
Chris
Chris,
I am pleased that you feel my responses to tax questions are thorough and complete.
However, you know what they say about free advice -- it is worth what you pay for it. If you offered to give me 2 cents, I would have to give you change.
[ Edited by NewKidInTown3 on Date 02/12/2008 ]