How to Determine Tax on Repossessed Personal Property
When you repossess personal property sold on the installment method, such as a car or a boat, you could have a gain or loss on the repossession. Determine the gain or loss by adding your costs to your basis in the installment obligation and deducting the total from the fair market value (FMV) of the property. Add additional recoveries from the buyer to FMV before the gain or loss is calculated.
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Instructions
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1
Estimate the FMV of the personal property being repossessed by a reasonable method. Property recovered by your high bid at a public auction or judicial sale has a FMV equal to the winning bid.
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2
Calculate your basis in the installment obligation at the time of repossession by applying the gross profit percentage to the unpaid balance of the obligation to arrive at the unrealized profit. Subtract this unrealized profit amount from the total unpaid balance to determine your basis in the obligation.
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3
Add your costs of repossessing the property to the basis in the obligation calculated in Step 2. Subtract the total from the FMV of the repossessed property to arrive at the gain or loss on the repossession.
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4
Report the gain or loss on repossession on the same basis, either as a capital gain or an ordinary gain, as you reported on the original sale. The installment method must have been used at the time of the sale.
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Tips & Warnings
If the installment method was not used for tax purposes on the original sale, any gain is reported as ordinary income. Since the full gain was reported in the year of sale, any loss on repossession is considered to be a bad debt.
