IRC Section 1038 outlines the general rules of real property repossessions. Under 1038, a seller’s repossession of real property due to the buyer’s default does not result in recognition of loss by the seller and gain is recognized only to a limited extent. The realty repossession rules basically treat all payments received from a sale before repossession as income. However, they limit the taxable gain to the profit the seller expected to receive from the original sale. Application of the realty repossession rules is mandatory, not elective.

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