§1038 — Certain reacquisitions of real property
16 cases·6 followed·4 distinguished·6 cited—38% support
Statute Text — 26 U.S.C. §1038
If—
a sale of real property gives rise to indebtedness to the seller which is secured by the real property sold, and
the seller of such property reacquires such property in partial or full satisfaction of such indebtedness,
then, except as provided in subsections (b) and (d), no gain or loss shall result to the seller from such reacquisition, and no debt shall become worthless or partially worthless as a result of such reacquisition.
In the case of a reacquisition of real property to which subsection (a) applies, gain shall result from such reacquisition to the extent that—
the amount of money and the fair market value of other property (other than obligations of the purchaser) received, prior to such reacquisition, with respect to the sale of such property, exceeds
the amount of the gain on the sale of such property returned as income for periods prior to such reacquisition.
The amount of gain determined under paragraph (1) resulting from a reacquisition during any taxable year beginning after the date of the enactment of this section shall not exceed the amount by which the price at which the real property was sold exceeded its adjusted basis, reduced by the sum of—
the amount of the gain on the sale of such property returned as income for periods prior to the reacquisition of such property, and
the amount of money and the fair market value of other property (other than obligations of the purchaser received with respect to the sale of such property) paid or transferred by the seller in connection with the reacquisition of such property.
For purposes of this paragraph, the price at which real property is sold is the gross sales price reduced by the selling commissions, legal fees, and other expenses incident to the sale of such property which are properly taken into account in determining gain or loss on such sale.
Except as provided in this section, the gain determined under this subsection resulting from a reacquisition to which subsection (a) applies shall be recognized, notwithstanding any other provision of this subtitle.
If subsection (a) applies to the reacquisition of any real property, the basis of such property upon such reacquisition shall be the adjusted basis of the indebtedness to the seller secured by such property (determined as of the date of reacquisition), increased by the sum of—
the amount of the gain determined under subsection (b) resulting from such reacquisition, and
the amount described in subsection (b)(2)(B).
If any indebtedness to the seller secured by such property is not discharged upon the reacquisition of such property, the basis of such indebtedness shall be zero.
If, prior to a reacquisition of real property to which subsection (a) applies, the seller has treated indebtedness secured by such property as having become worthless or partially worthless—
such seller shall be considered as receiving, upon the reacquisition of such property, an amount equal to the amount of such indebtedness treated by him as having become worthless, and
the adjusted basis of such indebtedness shall be increased (as of the date of reacquisition) by an amount equal to the amount so considered as received by such seller.
If—
subsection (a) applies to a reacquisition of real property with respect to the sale of which gain was not recognized under section 121 (relating to gain on sale of principal residence); and
within 1 year after the date of the reacquisition of such property by the seller, such property is resold by him,
then, under regulations prescribed by the Secretary, subsections (b), (c), and (d) of this section shall not apply to the reacquisition of such property and, for purposes of applying section 121, the resale of such property shall be treated as a part of the transaction constituting the original sale of such property.
Under regulations prescribed by the Secretary, if an installment obligation is indebtedness to the seller which is described in subsection (a), and if such obligation is, in the hands of the taxpayer, an obligation with respect to which section 691(a)(4)(B) applies, then—
for purposes of subsection (a), acquisition of real property by the taxpayer shall be treated as reacquisition by the seller, and
the basis of the real property acquired by the taxpayer shall be increased by an amount equal to the deduction under section 691(c) which would (but for this subsection) have been allowable to the taxpayer with respect to the gain on the exchange of the obligation for the real property.
Treasury Regulations
- Treas. Reg. §Treas. Reg. §1.1038-1 Reacquisitions of real property in satisfaction of indebtedness
- Treas. Reg. §Treas. Reg. §1.1038-1(a) Scope of section 1038—(1) General rule on gain or loss.
- Treas. Reg. §Treas. Reg. §1.1038-1(b) Amount of gain resulting from a reacquisition—(1) Determination of amount—(i) In general.
- Treas. Reg. §Treas. Reg. §1.1038-1(c) Limitation upon amount of gain—(1) In general.
- Treas. Reg. §Treas. Reg. §1.1038-1(d) Character of gain resulting from a reacquisition.
- Treas. Reg. §Treas. Reg. §1.1038-1(e) Recognition of gain.
- Treas. Reg. §Treas. Reg. §1.1038-1(f) Special rules applicable to worthless indebtedness—(1) Worthlessness resulting from reacquisition.
- Treas. Reg. §Treas. Reg. §1.1038-1(g) Rules for determining gain or loss on disposition of reacquired property—(1) Basis of reacquired real property.
- Treas. Reg. §Treas. Reg. §1.1038-1(h) Illustrations.
- Treas. Reg. §Treas. Reg. §1.1038-1(i) §1.1038-1(i)
- Treas. Reg. §Treas. Reg. §1.1038-2 Reacquisition and resale of property used as a principal residence
- Treas. Reg. §Treas. Reg. §1.1038-2(a) Application of special rules—(1) In general.
- Treas. Reg. §Treas. Reg. §1.1038-2(b) Transactions not included.
- Treas. Reg. §Treas. Reg. §1.1038-2(c) Redetermination of gain required—(1) Sale of old residence.
- Treas. Reg. §Treas. Reg. §1.1038-2(d) Redetermination of adjusted sales price.
- Treas. Reg. §Treas. Reg. §1.1038-2(e) Determination of adjusted basis at time of resale.
- Treas. Reg. §Treas. Reg. §1.1038-2(f) Treatment of indebtedness secured by the property—(1) Year of reacquisition.
- Treas. Reg. §Treas. Reg. §1.1038-2(g) Date of sale.
- Treas. Reg. §Treas. Reg. §1.1038-2(h) Illustrations.
- Treas. Reg. §Treas. Reg. §1.1038-2(i) §1.1038-2(i)
- Treas. Reg. §Treas. Reg. §1.1038-3 Election to have section 1038 apply for taxable years beginning after December 31, 1957
- Treas. Reg. §Treas. Reg. §1.1038-3(a) In general.
- Treas. Reg. §Treas. Reg. §1.1038-3(b) Time and manner of making election—(1) In general.
- Treas. Reg. §Treas. Reg. §1.1038-3(c) Extension of period of limitations on assessment or refund—(1) Assessment of tax.
- Treas. Reg. §Treas. Reg. §1.1038-3(d) Payment of interest for period prior to September 2, 1964.
16 Citing Cases
Section 1038(e) provides taxpayers with a "special rule" that "in effect ignores the repossession * * * where the residence is again sold in a reasonable time." S. Rept. No. 88-1361, supra at 7, 1964-2 C.B. at 832. Petitioner and respondent agree that section 1038(e) does not govern the instant case since petitioner did not resell the property within one year of repossession.
The sole issue in this case is whether petitioner underreported his long-term capital gains as a result of his failure to recognize gain pursuant to section 1038 on the reacquisition of property where gain had been previously excluded under section 121.
This case is unlike the situation covered by section 1038, where the seller of real property reacquires his property in satisfaction of indebtedness to the seller.
-38- [*38] entitled to the worthless debt deductions on the basis ofsection 1038, which disallows such deductions on the repossession ofproperty in satisfaction ofthe debt secured by the property, is not related to the values ofthe notes or the high default rate.
We hold that section 1038 governs petitioner’s reacquisition in 1990 of the property upon the buyer’s default on the installment note secured by the property; petitioner must include $383,288 as gain in his 1990 gross income.