
From the U.S. Code Online via GPO Access
[wais.access.gpo.gov]
[Laws in effect as of January 2, 2001]
[Document not affected by Public Laws enacted between
  January 2, 2001 and January 28, 2002]
[CITE: 26USC1038]

 
                     TITLE 26--INTERNAL REVENUE CODE
 
                        Subtitle A--Income Taxes
 
                  CHAPTER 1--NORMAL TAXES AND SURTAXES
 
          Subchapter O--Gain or Loss on Disposition of Property
 
                  PART III--COMMON NONTAXABLE EXCHANGES
 
Sec. 1038. Certain reacquisitions of real property


(a) General rule

    If--
        (1) a sale of real property gives rise to indebtedness to the 
    seller which is secured by the real property sold, and
        (2) the seller of such property reacquires such property in 
    partial or full satisfaction of such indebtedness,

then, except as provided in subsections (b) and (d), no gain or loss 
shall result to the seller from such reacquisition, and no debt shall 
become worthless or partially worthless as a result of such 
reacquisition.

(b) Amount of gain resulting

                           (1) In general

        In the case of a reacquisition of real property to which 
    subsection (a) applies, gain shall result from such reacquisition to 
    the extent that--
            (A) the amount of money and the fair market value of other 
        property (other than obligations of the purchaser) received, 
        prior to such reacquisition, with respect to the sale of such 
        property, exceeds
            (B) the amount of the gain on the sale of such property 
        returned as income for periods prior to such reacquisition.

                           (2) Limitation

        The amount of gain determined under paragraph (1) resulting from 
    a reacquisition during any taxable year beginning after the date of 
    the enactment of this section shall not exceed the amount by which 
    the price at which the real property was sold exceeded its adjusted 
    basis, reduced by the sum of--
            (A) the amount of the gain on the sale of such property 
        returned as income for periods prior to the reacquisition of 
        such property, and
            (B) the amount of money and the fair market value of other 
        property (other than obligations of the purchaser received with 
        respect to the sale of such property) paid or transferred by the 
        seller in connection with the reacquisition of such property.

    For purposes of this paragraph, the price at which real property is 
    sold is the gross sales price reduced by the selling commissions, 
    legal fees, and other expenses incident to the sale of such property 
    which are properly taken into account in determining gain or loss on 
    such sale.

                         (3) Gain recognized

        Except as provided in this section, the gain determined under 
    this subsection resulting from a reacquisition to which subsection 
    (a) applies shall be recognized, notwithstanding any other provision 
    of this subtitle.

(c) Basis of reacquired real property

    If subsection (a) applies to the reacquisition of any real property, 
the basis of such property upon such reacquisition shall be the adjusted 
basis of the indebtedness to the seller secured by such property 
(determined as of the date of reacquisition), increased by the sum of--
        (1) the amount of the gain determined under subsection (b) 
    resulting from such reacquisition, and
        (2) the amount described in subsection (b)(2)(B).

If any indebtedness to the seller secured by such property is not 
discharged upon the reacquisition of such property, the basis of such 
indebtedness shall be zero.

(d) Indebtedness treated as worthless prior to reacquisition

    If, prior to a reacquisition of real property to which subsection 
(a) applies, the seller has treated indebtedness secured by such 
property as having become worthless or partially worthless--
        (1) such seller shall be considered as receiving, upon the 
    reacquisition of such property, an amount equal to the amount of 
    such indebtedness treated by him as having become worthless, and
        (2) the adjusted basis of such indebtedness shall be increased 
    (as of the date of reacquisition) by an amount equal to the amount 
    so considered as received by such seller.

(e) Principal residences

    If--
        (1) subsection (a) applies to a reacquisition of real property 
    with respect to the sale of which gain was not recognized under 
    section 121 (relating to gain on sale of principal residence); and
        (2) within 1 year after the date of the reacquisition of such 
    property by the seller, such property is resold by him,

then, under regulations prescribed by the Secretary, subsections (b), 
(c), and (d) of this section shall not apply to the reacquisition of 
such property and, for purposes of applying section 121, the resale of 
such property shall be treated as a part of the transaction constituting 
the original sale of such property.

[(f) Repealed. Pub. L. 104-188, title I, Sec. 1616(b)(12), Aug. 20, 
        1996, 110 Stat. 1857]

(g) Acquisition by estate, etc., of seller

    Under regulations prescribed by the Secretary, if an installment 
obligation is indebtedness to the seller which is described in 
subsection (a), and if such obligation is, in the hands of the taxpayer, 
an obligation with respect to which section 691(a)(4)(B) applies, then--
        (1) for purposes of subsection (a), acquisition of real property 
    by the taxpayer shall be treated as reacquisition by the seller, and
        (2) the basis of the real property acquired by the taxpayer 
    shall be increased by an amount equal to the deduction under section 
    691(c) which would (but for this subsection) have been allowable to 
    the taxpayer with respect to the gain on the exchange of the 
    obligation for the real property.

(Added Pub. L. 88-570, Sec. 2(a), Sept. 2, 1964, 78 Stat. 854; amended 
Pub. L. 94-455, title XIX, Sec. 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 
1834; Pub. L. 95-600, title IV, Secs. 404(c)(6), 405(c)(3), Nov. 6, 
1978, 92 Stat. 2870, 2871; Pub. L. 96-471, Sec. 4, Oct. 19, 1980, 94 
Stat. 2255; Pub. L. 104-188, title I, Sec. 1616(b)(12), Aug. 20, 1996, 
110 Stat. 1857; Pub. L. 105-34, title III, Sec. 312(d)(8), Aug. 5, 1997, 
111 Stat. 840.)


                               Amendments

    1997--Subsec. (e). Pub. L. 105-34 amended heading and text of 
subsec. (e) generally. Prior to amendment, text read as follows: ``If--
        ``(1) subsection (a) applies to a reacquisition of real property 
    with respect to the sale of which--
            ``(A) an election under section 121 (relating to one-time 
        exclusion of gain from sale of principal residence by individual 
        who has attained age 55) is in effect, or
            ``(B) gain was not recognized under section 1034 (relating 
        to rollover of gain on sale of principal residence); and
        ``(2) within one year after the date of the reacquisition of 
    such property by the seller, such property is resold by him,
then, under regulations prescribed by the Secretary, subsections (b), 
(c), and (d) of this section shall not apply to the reacquisition of 
such property and, for purposes of applying sections 121 and 1034, the 
resale of such property shall be treated as a part of the transaction 
constituting the original sale of such property.''
    1996--Subsec. (f). Pub. L. 104-188 struck out subsec. (f) which read 
as follows:
    ``(f) Reacquisitions by Domestic Building and Loan Associations.--
This section shall not apply to a reacquisition of real property by an 
organization described in section 593(a) (relating to domestic building 
and loan associations, etc.).''
    1980--Subsec. (g). Pub. L. 96-471 added subsec. (g).
    1978--Subsec. (e)(1)(A). Pub. L. 95-600, Sec. 404(c)(6), substituted 
``relating to one-time exclusion of gain from sale of principal 
residence by individual who has attained age 55'' for ``relating to gain 
from sale or exchange of residence of an individual who has attained age 
65''.
    Subsec. (e)(1)(B). Pub. L. 95-600, Sec. 405(c)(3), which directed 
the amendment of section 1083(e)(1)(B) of this title by substituting 
``(relating to rollover of gain on sale of principal residence)'' for 
``(relating to sale or exchange of residence)'', was executed to this 
section to reflect the probable intent of Congress because section 1083 
does not contain a subsec. (e)(1)(B).
    1976--Subsec. (e). Pub. L. 94-455 struck out ``or his delegate'' 
after ``Secretary''.


                    Effective Date of 1997 Amendment

    Amendment by Pub. L. 105-34 applicable to sales and exchanges after 
May 6, 1997, with certain exceptions, see section 312(d) of Pub. L. 105-
34, set out as a note under section 121 of this title.


                    Effective Date of 1996 Amendment

    Amendment by Pub. L. 104-188 applicable to taxable years beginning 
after Dec. 31, 1995, see section 1616(c) of Pub. L. 104-188, set out as 
a note under section 593 of this title.


                    Effective Date of 1980 Amendment

    Section 6(c) of Pub. L. 96-471 provided: ``The amendment made by 
section 4 [amending this section] shall apply to acquisitions of real 
property by the taxpayer after the date of the enactment of this Act 
[Oct. 19, 1980].''


                    Effective Date of 1978 Amendment

    Amendment by section 404(c)(6) of Pub. L. 95-600 applicable to sales 
or exchanges after July 26, 1978, in taxable years ending after such 
date, see section 404(d)(1) of Pub. L. 95-600, set out as a note under 
section 121 of this title.
    Section 405(d) of Pub. L. 95-600 provided that: ``The amendments 
made by this section [amending this section and sections 1034, 1250, 
6212, and 6504 of this title] shall apply to sales and exchanges of 
residences after July 26, 1978, in taxable years ending after such 
date.''


Effective Date; Election To Apply to Taxable Years Beginning After Dec. 
                                31, 1957

    Section 2(c) of Pub. L. 88-570 provided that:
    ``(1) The amendments made by this section [enacting this section] 
shall apply to taxable years beginning after the date of the enactment 
of this Act [Sept. 2, 1964].
    ``(2) If the taxpayer makes an election under this paragraph, the 
amendments made by this section [enacting this section] shall also apply 
to taxable years beginning after December 31, 1957, except that such 
amendments shall not apply with respect to any reacquisition of real 
property in a taxable year for which the assessment of a deficiency, or 
the credit or refund of an overpayment, is prevented on the date of the 
enactment of this Act [Sept. 2, 1964] by the operation of any law or 
rule of law. An election under this paragraph shall be made within one 
year after the date of the enactment of this Act and shall be made in 
such form and manner as the Secretary of the Treasury or his delegate 
shall prescribe by regulations.
    ``(3) If an election is made by the taxpayer under paragraph (2), 
and if the assessment of a deficiency, or the credit or refund of an 
overpayment, for any taxable year to which such election applies is not 
prevented on the date of the enactment of this Act [Sept. 2, 1964] by 
the operation of any law or rule of law--
        ``(A) the period within which a deficiency for such taxable year 
    may be assessed (to the extent such deficiency is attributable to 
    the application of the amendments made by this section) shall not 
    expire prior to one year after the date of such election; and
        ``(B) the period within which a claim for credit or refund of an 
    overpayment for such taxable year may be filed (to the extent such 
    overpayment is attributable to the application of such amendments) 
    shall not expire prior to one year after the date of such election.
No interest shall be payable with respect to any deficiency attributable 
to the application of such amendments, and no interest shall be allowed 
with respect to any credit or refund of any overpayment attributable to 
the application of such amendments, for any period prior to the date of 
the enactment of this Act. An election by a taxpayer under paragraph (2) 
shall be deemed a consent to the application of this paragraph.''
