By repossessing a personal residence the taxpayer had sold by taking an installment note, the taxpayer ended up losing access to the IRC §121 $500,000 exclusion of gain on the sale of a principal residence in the case of Debough v. Commissioner, 141 TC No. 17, affd CA8, 2015 TNT 168-11, No. 14-3036.

The case deals with the interplay of IRC §121 (the exclusion for the gain on the sale of a qualifying residence) and IRC §1038 (a provision that is meant to offer relief when a taxpayer repossesses real property).  Effectively the Tax Court concluded that IRC §1038’s provisions trump the relief provision of IRC §121 in this fact pattern.