Three Criteria Necessary For Realty Repossession Rules to Apply
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The buyer’s indebtedness to the seller must have originated from the sale of the seller’s real property and be secured by that property.
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The seller must have reacquired the real property to either fully or partially satisfy that indebtedness.
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The seller cannot pay additional consideration to the buyer in order to get the property back unless the additional consideration was stipulated in the original sale, or the buyer has defaulted or is about to default on an obligation.
The IRS has three criteria that are necessary for realty repossession rules to apply. If these criteria are not met, the case is a personal repossession, as explained in more detail below.
Unless all three of the above conditions are met, the repossession is, as noted, treated as personal property repossession and reported accordingly. The repossession rules apply whether:
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The property is reacquired from the original buyer or a subsequent buyer (but the property must be acquired by the original seller, not a later holder of the loan)
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The seller provides additional consideration as provided in the third bullet above (e.g., taking property subject to a mortgage or back taxes)
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The sale was reported on the instalment method, or the gain was fully taxed
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Title to the property has passed to the purchaser or not
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The original sale showed a gain or a loss
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The property has increased or decreased in value since the time of the original sale.
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The property is reacquired by voluntary conveyance or foreclosure.