Free repossession of real property calculator
Enter the original gain, payments received, and repossession costs — this real property repossession calculator applies the §1038 cap to compute recognized gain and new basis, updated live, as you type.
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No prepayment penalty assumed. Contact your lender to confirm extra payments apply to principal.
Results are estimates. Consult a professional.
How the real property repossession calculator works
IRC §1038 provides special — and favorable — rules when a seller of real property repossesses it after a buyer defaults on an installment sale. Unlike personal property repossessions under §453B, §1038 caps the recognized gain at the lesser of (a) the original gain reported on the sale, or (b) the net amount received before default minus repossession costs. This means you can never recognize more gain on repossession than you had on the original sale, regardless of how much the property's value has changed.
The new basis formula has three components: the adjusted basis of the installment note cancelled at repossession (the unrecovered cost embedded in the remaining note balance), repossession costs paid by the seller, and the recognized gain itself (since you've now paid tax on that amount, it gets added to basis). The holding period of the repossessed property generally relates back to the original acquisition date if no gain was recognized — preserving long-term capital gains treatment in a future sale.
IRS — IRC §1038, Certain Reacquisitions of Real Property; Publication 537, Installment Sales.Worked example: land sold $300k, buyer paid $40k, then seller repossesses
A seller sold land (no building, so no depreciation recapture) for $300,000 on the installment method. The seller's adjusted basis at the time of sale was $200,000, producing an original gain of $100,000. The buyer paid $40,000 before defaulting. The seller incurred $5,000 in repossession costs. The note's remaining adjusted basis at repossession is $18,000 (reflecting the cost-ratio of unrecovered principal).
Recognized gain by original gain and payments received — $5k repo costs
The table below varies the original gain on sale ($50k, $100k, $200k) and the payments received before default ($20k, $50k, $80k), holding repossession costs at $5,000. It shows how the §1038 cap prevents gain from exceeding the original sale gain — and how gain can be far less when few payments were collected.
| Original gain | Payments received | Payments − repo costs | Recognized gain |
|---|---|---|---|
| $50,000 | $20,000 | $15,000 | $15,000 |
| $50,000 | $50,000 | $45,000 | $45,000 |
| $50,000 | $80,000 | $75,000 | $50,000 |
| $100,000 | $20,000 | $15,000 | $15,000 |
| $100,000 | $50,000 | $45,000 | $45,000 |
| $100,000 | $80,000 | $75,000 | $75,000 |
| $200,000 | $20,000 | $15,000 | $15,000 |
| $200,000 | $50,000 | $45,000 | $45,000 |
| $200,000 | $80,000 | $75,000 | $75,000 |
Recognized gain = min(original gain, max(0, payments received − $5k repo costs)). Source: IRC §1038; IRS Publication 537.
Tips for real property repossessions under §1038
Section 1038 is one of the few provisions in the tax code that actively benefits the defaulted seller. Understanding its mechanics — and its limits — lets you structure repossession in the most tax-efficient way possible.
- Confirm the property qualifies as real property. Section 1038 applies only to real property (land and buildings) sold on the installment method. Personal property, equipment, and intangibles fall under the less favorable §453B rules. Mixed transactions may require allocation.
- Track the note's adjusted basis at repossession. The note's basis — critical for computing the new property basis — equals its face value multiplied by the cost ratio (1 minus the gross profit ratio). This figure appears on a correctly maintained Form 6252 schedule.
- Document repossession costs contemporaneously. Legal fees, court costs, back-property-tax payments made by the seller, and reconditioning expenses all enter the new basis calculation and reduce recognized gain. Keep receipts dated at the repossession event.
- Understand the holding period benefit. If no gain is recognized on repossession, the IRS treats the seller's holding period as continuous from the original acquisition. This preserves long-term capital gain treatment when the re-acquired property is eventually resold.
- Check for depreciation recapture on buildings. If the original sale involved depreciable improvements, §1250 (unrecaptured depreciation at 25%) or §1245 may apply on top of §1038 gain. The §1038 cap does not shield recapture income — plan for this with your CPA before repossessing.
Accuracy and limitations
This calculator applies the IRC §1038 gain recognition formula as documented in IRS Publication 537. It correctly caps recognized gain at the lesser of the original gain or net payments received (after repossession costs), and it computes the new basis using the three-component formula. It does not compute the note's adjusted basis automatically — that input must come from your installment-sale records (Form 6252). It also does not model §1250 depreciation recapture for buildings, §1031 exchange interactions, or state-level differences in §1038 conformity.
Not tax or legal advice. Real property repossessions under §1038 involve multi-year installment records, depreciation recapture analysis, note basis calculations, and state conformity issues that vary by jurisdiction. Tax outcomes depend on the specific facts and documentation of your transaction. Consult a licensed CPA or tax attorney before completing a repossession or filing your return. This tool is educational only and is not a substitute for qualified professional tax advice.
Real property repossession terms defined
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