What happens on repossession of installment property?

What counts as a repossession

The publication says the repossession rules apply whether or not title was ever transferred to the buyer, and it does not matter whether you foreclose or the buyer surrenders the property. It is not a repossession if the buyer puts the property up for sale and you repurchase it. The repossession must at least partially discharge the buyer's installment obligation, and the discharged obligation must be secured by the property. That is met if the property is auctioned after you foreclose and you apply the obligation to your bid price. You report the gain or loss on the same form you used for the original sale; if it was Form 4797, use it for the repossession. Special rules may apply to a repossessed main home; the publication points to Regulations section 1.1038-2.

Personal property, installment method used

Gain or loss is the fair market value of the property, plus anything else you receive from the buyer, minus your basis in the installment obligation and your repossession expenses. The basis in the obligation is the unpaid balance minus the unrealized profit, where unrealized profit is the unpaid balance times your gross profit percentage. Gain or loss has the same character, capital or ordinary, as the gain on the original sale. Your basis in the repossessed personal property is its fair market value at repossession.

Its example is a piano sold for $1,500 in December 2024: $300 down and $100 a month. The percentage is 40%. After four payments the buyer defaulted with $800 unpaid. The piano is worth $1,400 and repossession costs are $75. Unrealized profit is $320, basis of the obligation is $480, adding costs gives $555, and the gain is $1,400 minus $555, or $845. Choose personal property above and enter 1,400, 800, 40 and 75 to reproduce it.

Personal property, installment method not used

If you reported the whole gain in the year of sale, the publication says your basis in the obligation is generally its issue price (increased by OID included in income and decreased by payments other than qualified stated interest), or otherwise the amount realized attributable to the obligation. A gain on repossession is then all ordinary income, and a loss is a bad debt, deducted as a business or nonbusiness bad debt depending on the original property. The calculator above covers only the installment-method case.

Real property

Real property rules let you keep essentially the same adjusted basis you had before the sale, which in effect cancels the original sale. They are mandatory, installment method or not, when three conditions are met: the repossession protects your security rights, the obligation satisfied was received in the original sale, and you pay no additional consideration to the buyer to get the property back unless the original contract provided for it or the buyer has defaulted or default is imminent. If one condition fails, use the personal property rules.

Your gain is total payments received or considered received minus the gain already reported, but taxable gain is limited to the original gross profit minus the gain reported before repossession and your repossession costs. Character follows the original sale, except that if you did not use the installment method the gain is ordinary income. The limit does not apply if the selling price is indefinite.

Real property example

A tract of land sold in January 2023 for $25,000: $5,000 down and a $20,000 mortgage at $4,000 a year plus 9.5%. Adjusted basis was $19,000 and selling expenses $1,000, so gross profit is $5,000 and the percentage is 20%. You reported $1,000 in 2023 and $800 in 2024. In 2025 the buyer defaulted and you spent $500 on legal fees. Payments received are $9,000 and gain reported is $1,800, so the gain on repossession is $7,200, but the limit is $5,000 minus $2,300, or $2,700, and $2,700 is taxable. With $16,000 still owed, unrealized profit is $3,200, the obligation basis is $12,800, and your basis in the land is $12,800 plus $2,700 plus $500, which is $16,000. Choose real property and enter 9,000, 1,800, 5,000, 500, 16,000 and 20 to reproduce it.

Sources

• IRS Publication 537, Installment Sales (2025): Repossession; Personal Property; Real Property; Worksheets C, D and E. Read November 2, 2026.

Edition read: Publication 537 (2025), for use in preparing 2025 returns. Dollar thresholds on this page are the figures printed in that edition; check the current publication, Form 6252 and its instructions for your tax year. This page summarizes the publication and does not replace it.