[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: 26CFR1.453-6]

[Page 125-126]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.453-6  Deferred payment sale of real property not on installment method.

    (a) Value of obligations. (1) In transactions included in paragraph 
(b)(2) of Sec. 1.453-4, that is, sales of real property involving 
deferred payments in which the payments received during the year of sale 
exceed 30 percent of the selling price, the obligations of the purchaser 
received by the vendor are to be considered as an amount realized to the 
extent of their fair market value in ascertaining the profit or loss 
from the transaction. Such obligations, however, are not considered in 
determining whether the payments during the year of sale exceed 30 
percent of the selling price.
    (2) If the obligations received by the vendor have no fair market 
value, the payments in cash or other property having a fair market value 
shall be applied against and reduce the basis of the property sold and, 
if in excess of such basis, shall be taxable to the extent of the 
excess. Gain or loss is realized when the obligations are disposed of or 
satisfied, the amount thereof being the difference between the reduced 
basis as provided in the preceding sentence and the amount realized 
therefor. Only in rare and extraordinary cases does property have no 
fair market value.
    (b) Repossession of property where title is retained by vendor--(1) 
Gain or loss on repossession. If the vendor in sales referred to in 
paragraph (a) of this section has retained title to the property and the 
purchaser defaults in any of his payments, and the vendor repossesses 
the property, the difference between--
    (i) The entire amount of the payments actually received on the 
contract and retained by the vendor plus the fair market value at the 
time of repossession of fixed improvements placed on the property by the 
purchaser, and
    (ii) The sum of the profits previously returned as income in 
connection therewith and an amount representing what would have been a 
proper adjustment for exhaustion, wear and tear, obsolescence, 
amortization, and depletion of the property during the period the 
property was in the hands of the purchaser had the sale not been made, 
will constitute gain or loss, as the case may be, to the vendor for the 
year in which the property is repossessed.
    (2) Basis of repossessed property. The basis of the property 
described in subparagraph (1) of this paragraph in the hands of the 
vendor will be the original basis at the time of the sale plus the fair 
market value at the time of repossession of fixed improvements placed on 
the property by the purchaser, except that, with respect to 
repossessions occurring after September 18, 1958, the

[[Page 126]]

basis of the property shall be reduced by what would have been a proper 
adjustment for exhaustion, wear and tear, obsolescence, amortization, 
and depletion of the property during the period the property was in the 
hands of the purchaser if the sale had not been made.
    (c) Reacquisition of property where title is transferred to 
purchaser--(1) Gain or loss on reacquisition. If the vendor in sales 
described in paragraph (a) of this section has previously transferred 
title to the purchaser, and the purchaser defaults in any of his 
payments, and the vendor accepts a voluntary reconveyance of the 
property, in partial or full satisfaction of the unpaid portion of the 
purchase price, the receipt of the property so reacquired, to the extent 
of its fair market value at that time, including the fair market value 
of fixed improvements placed on the property by the purchaser, shall be 
considered as the receipt of payment on the obligations satisfied. If 
the fair market value of the property is greater than the basis of the 
obligations of the purchaser so satisfied (generally, such basis being 
the fair market value of such obligations previously recognized in 
computing income), the excess constitutes ordinary income. If the value 
of such property is less than the basis of such obligations, the 
difference may be deducted as a bad debt if uncollectible, except that, 
if the obligations satisfied are securities (as defined in section 
165(g)(2)(C)), any gain or loss resulting from the transaction is a 
capital gain or loss subject to the provisions of sections 1201 through 
1241.
    (2) Basis of reacquired property. If the reacquired property 
described in subparagraph (1) of this paragraph 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 the fixed improvements placed on the property by the purchaser. See 
section 166 and the regulations thereunder with respect to property 
reacquired by the vendor in a foreclosure proceeding.
    (d) Effective date. Paragraphs (b) and (c) of this section 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.

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