[Code of Federal Regulations]
[Title 26, Volume 2]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.166-6]

[Page 919-920]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.166-6  Sale of mortgaged or pledged property.

    (a) Deficiency deductible as bad debt--(1) Principal amount. If 
mortgaged or pledged property is lawfully sold (whether to the creditor 
or another purchaser) for less than the amount of the debt, and the 
portion of the indebtedness remaining unsatisfied after the sale is 
wholly or partially uncollectible, the mortgagee or pledgee may deduct 
such amount under section 166(a) (to the extent that it constitutes 
capital or represents an item the income from which has been returned by 
him) as a bad debt for the taxable year in which it becomes wholly 
worthless or is charged off as partially worthless. See Sec. 1.166-3.
    (2) Accrued interest. Accrued interest may be included as part of 
the deduction allowable under this paragraph, but only if it has 
previously been returned as income.
    (b) Realization of gain or loss--(1) Determination of amount. If, in 
the case of a sale described in paragraph (a) of this

[[Page 920]]

section, the creditor buys in the mortgaged or pledged property, loss or 
gain is also realized, measured by the difference between the amount of 
those obligations of the debtor which are applied to the purchase or bid 
price of the property (to the extent that such obligations constitute 
capital or represent an item the income from which has been returned by 
the creditor) and the fair market value of the property.
    (2) Fair market value defined. The fair market value of the property 
for this purpose shall, in the absence of clear and convincing proof to 
the contrary, be presumed to be the amount for which it is bid in by the 
taxpayer.
    (c) Basis of property purchased. If the creditor subsequently sells 
the property so acquired, the basis for determining gain or loss upon 
the subsequent sale is the fair market value of the property at the date 
of its acquisition by the creditor.
    (d) Special rules applicable to certain banking organizations. For 
special rules relating to the treatment of mortgaged or pledged property 
by certain mutual savings banks, domestic building and loan 
associations, and cooperative banks, see section 595 and the regulations 
thereunder.
    (e) Special rules applicable to certain reacquisitions of real 
property. Notwithstanding this section, special rules apply for taxable 
years beginning after September 2, 1964 (and for certain taxable years 
beginning after December 31, 1957), to the gain or loss on certain 
reacquisitions of real property, to indebtedness remaining unsatisfied 
as a result of such reacquisitions, and to the basis of the reacquired 
real property. See Sec. Sec. 1.1038-1 through 1.1038-3.

[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 6814, 30 FR 
4472, Apr. 7, 1965, T.D. 6916, 32 FR 5923, Apr. 13, 1967]