[Code of Federal Regulations]
[Title 26, Volume 6]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.453-5]

[Page 124-125]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.453-5  Sale of real property treated on installment method.

    (a) In general. In any transaction described in paragraph (b)(1) of 
Sec. 1.453-4, that is, sales of real property in which there are no 
payments during the year of sale or the payments in that year do not 
exceed 30 percent of the selling price, the vendor may return as income 
from each such transaction in any taxable year that proportion of the 
installment payments actually received in that year which the gross 
profit (as described in paragraph (b) of Sec. 1.453-1) realized or to 
be realized when the property is paid for bears to the total contract 
price. In any case, the sale of each lot or parcel of a subdivided tract 
must be treated as a separate transaction and gain or loss computed 
accordingly. (See paragraph (a) of Sec. 1.61-6.)
    (b) Defaults and repossessions--(1) Effective date. This paragraph 
shall apply only with respect to taxable years beginning before 
September 3, 1964, in respect of which an election has not been properly 
made to have the provisions of section 1038 apply. For rules applicable 
to taxable years beginning after September 2, 1964, and for taxable 
years beginning after December 31, 1957, to which such an election 
applies, see section 1038, and Sec. Sec. 1.1038-1 through 1.1038-3.
    (2) Gain or loss on reacquisition of property. If the purchaser of 
real property on the installment plan defaults in any of his payments, 
and the vendor returning income on the installment method reacquires the 
property sold, whether title thereto had been retained by the vendor or 
transferred to the purchaser, gain or loss for the year in which the 
reacquisition occurs is to be computed upon any installment obligations 
of the purchaser which are satisfied or discharged upon the 
reacquisition or are applied by the vendor to the purchase or bid price 
of the property. Such gain or loss is to be measured by the difference 
between the fair market value at the date of reacquisition of the 
property reacquired (including the fair market value of any fixed 
improvements placed on the property by the purchaser) and the basis in 
the hands of the vendor of the obligations of the purchaser which are so 
satisfied, discharged, or applied, with proper adjustment for any other 
amounts realized or costs incurred in connection with the reacquisition.
    (3) Fair market value of reacquired property. If the property 
reacquired is bid in by the vendor at a foreclosure

[[Page 125]]

sale, the fair market value of the property shall be presumed to be the 
purchase or bid price thereof in the absence of clear and convincing 
proof to the contrary.
    (4) Basis of obligations. The basis in the hands of the vendor of 
the obligations of the purchaser satisfied, discharged, or applied upon 
the reacquisition of the property will be the excess of the face value 
of such obligations over an amount equal to the income which would be 
returnable were the obligations paid in full. For definition of the 
basis of an installment obligation, see section 453(d)(2) and paragraph 
(b)(2) of Sec. 1.453-9.
    (5) Bad debt deduction. No deduction for a bad debt shall in any 
case be taken on account of any portion of the obligations of the 
purchaser which are treated by the vendor as not having been satisfied, 
discharged, or applied upon the reacquisition of the property, unless it 
is clearly shown that after the property was reacquired the purchaser 
remained liable for such portion; and in no event shall the amount of 
the deduction exceed the basis in the hands of the vendor of the portion 
of the obligations with respect to which the purchaser remained liable 
after the reacquisition. See section 166 and the regulations thereunder.
    (6) Basis of reacquired property. If the property reacquired is 
subsequently sold, the basis for determining gain or loss is the fair 
market value of the property at the date of reacquisition, including the 
fair market value of any fixed improvements placed on the property by 
the purchaser.

[T.D. 6500, 25 FR 11716, Nov. 26, 1960, as amended by T.D. 6916, 32 FR 
5923, Apr. 13, 1967]