Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 73-36

1973-1 C.B. 372

Sec. 1211

IRS Headnote

Losses sustained by a purchaser-debtor as a result of the repossession of his real property acquired for investment are capital losses subject to the limitations of section 1211(b) of the Code regardless of whether he held legal title to the property when it was repossessed; I.T. 3135 superseded.

Full Text

Rev. Rul. 73-36 /1/

The purpose of this Revenue Ruling is to update and restate, under the current statute and regulations, the position set forth in I.T. 3135, 1937-2 C.B. 226.

The question presented is whether the losses realized by a taxpayer as a result of the repossession of his real property, under the circumstances described below, are capital losses subject to the limitations contained in section 1211(b) of the Internal Revenue Code of 1954.

Section 1221 of the Code provides that the term "capital asset" means property held by the taxpayer (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business.

Section 1211(b) of the Code provides, in part, that in the case of a taxpayer other than a corporation, losses from sales or exchanges of capital assets shall be allowed only to the extent of the gains from such sales or exchanges, plus (if such losses exceed such gains) whichever of the following is smallest: (A) the taxable income for the year, (B) $1,000, or (C) the sum of the excess of the net short-term capital loss over the net long-term capital gain, and one-half of the excess of the net long-term capital loss over the net short-term capital gain.

Situation 1. An individual taxpayer purchased unimproved real estate for investment on a land contract in 1965. Title to the property did not pass at the time of the sale. The purchase price under the contract was in excess of the balance due in 1972 when the taxpayer paid the seller an agreed amount in order to be released from any further liability under the contract. The taxpayer is not a dealer in real estate.

The real estate described above represents a capital asset within the meaning of section 1221 of the Code with respect to the taxpayer. Thus, the loss sustained by the taxpayer as a result of the exchange of the property for his obligation is a capital loss measured by the difference between the purchase price of the property, adjusted in accordance with section 1016 of the Code, and the amount of the obligation of the taxpayer canceled in exchange for such property. The cash paid by the taxpayer pursuant to the compromise is considered as a reduction from what would otherwise be considered as the amount of his obligation. The adjusted purchase price exceeded the amount of the taxpayer's obligation. Accordingly, it is held that the loss sustained by the taxpayer is subject to the limitations contained in section 1211(b) of the Code.

Situation 2. The taxpayer in Situation 1 above purchased additional unimproved real estate to be held as an investment and acquired title to such property in 1970. In 1972, a mortgage on the property was foreclosed. The property was bid in for the unpaid balance of the mortgage obligation plus accrued interest and taxes. The accrued interest and taxes were then canceled. The foreclosed property was not subject to redemption by the taxpayer since the mortgage foreclosure sale was final under state law. The adjusted cost of the real property to the taxpayer was in excess of the indebtedness at the time of the foreclosure.

The foreclosed real estate in the hands of the taxpayer was a capital asset within the meaning of section 1221 of the Code. The mortgage foreclosure was a sale of real estate in consideration of the cancellation of the mortgage debt and the taxpayer sustained a capital loss in the year of foreclosure equal to the excess of the purchase price of the real property, adjusted in accordance with section 1016 of the Code, over the amount of the canceled obligation.

Accordingly, it is held that the loss sustained by the taxpayer is subject to the limitations contained in section 1211(b) of the Code.

The conclusions in Situations 1 and 2 apply regardless of whether title originally passed to the purchaser-debtor. Section 1.453-6 of the Income Tax Regulations, in which a distinction is made depending on whether title passed to the purchaser, relates to the determination of gain or loss to the seller upon repossession and does not relate to the situation of the purchaser-debtor.

I.T. 3135 is superseded since the position set forth therein is restated under current law in this Revenue Ruling.

/1/ Prepared pursuant to Rev. Proc. 67-6, 1967-1 C.B. 576.