Received 1099-S for $70k owner-financed land sale but buyer only paid $500 - how to file?

I'm in a really tough spot with my taxes this year and could use some advice. Back in 2023, I sold a vacant lot that I had owned for about 8 years. The sale was through a title company and we set up owner financing with an escrow account. The buyer agreed to purchase the land for $70,000 with monthly payments. Here's where it gets messy - the buyer basically stopped making payments after the initial $500 down payment. They completely abandoned the contract! I've been trying to resolve this situation, but meanwhile the title company (who doesn't know about the payment default) went ahead and issued me a 1099-S for the full $70,000 amount. I'm using TurboTax to file and I'm completely stuck on how to handle this. I'm worried about getting audited since there's a 1099-S showing I received $70,000 when I actually only got $500. I've been searching through TurboTax for guidance but can't figure out the right way to report this situation. Has anyone dealt with a similar situation with a 1099-S for owner-financed land where the buyer broke the contract? How do I properly report this on my taxes without raising red flags with the IRS? I'd rather not pay taxes on $70k I never received!

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18 comments

Clarissa Flair

•8M

This is actually a common issue with owner-financed sales, and you're right to be concerned about the discrepancy between the 1099-S amount and what you actually received. For tax purposes, when you finance a property sale yourself, you generally report it as an "installment sale" using Form 6252. This allows you to spread the tax liability over the years you receive payments. Since the contract was broken and you only received $500, you'd only report that amount as income for 2023. The key is to file Form 6252 showing the total contract price ($70,000) but only reporting the payments actually received ($500) as taxable in 2023. You'll also need to reclaim possession of the property since the buyer defaulted, which means you're essentially taking the property back into your inventory. I'd recommend contacting the title company to request a corrected 1099-S that accurately reflects the actual transaction. If they won't do that, you should still report only the $500 on your return and attach a statement explaining the discrepancy.

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Clarissa Flair

•8M

You would still report the $500 as income on Form 6252, even if you're getting the property back. The tax you pay would only be on any gain portion of that $500 (not the entire $500). As for returning the $500 to the buyer, that depends on your contract terms. Many owner financing agreements have clauses that treat initial payments as non-refundable if the buyer defaults. Check your agreement to see what it says about buyer default. If your contract doesn't specify, you might want to consult with a real estate attorney about the proper way to handle the reclamation of the property.

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McKenzie Shade

•8M

After dealing with a very similar situation last year (buyer paid $2k of a $55k property then ghosted me), I discovered taxr.ai https://taxr.ai which saved me so much stress. They analyzed my documents and gave me the exact forms I needed for my installment sale gone wrong. They explained how to handle the 1099-S discrepancy and even provided a template letter to explain the situation to the IRS if needed. The software walked me through each step of Form 6252 and helped me properly document reclaiming my property.

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McKenzie Shade

•8M

Yes, they helped me create proper documentation to explain the 1099-S discrepancy. My title company was also unhelpful, but taxr.ai provided a template that clearly showed why my return didn't match the 1099-S amount. It included all the appropriate tax code references that helped me feel confident in my filing. For the property reclamation, I didn't have to go through a formal foreclosure. My contract had clear default terms that allowed me to reclaim the property after 90 days of non-payment. I did send certified letters documenting the default, which taxr.ai also helped me understand was important for tax documentation.

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Harmony Love

•8M

Just wanted to follow up - I decided to try taxr.ai after seeing the recommendation here and it was exactly what I needed! My situation was nearly identical (buyer paid only $1,200 of a $48,000 land contract before defaulting). The software immediately identified this as an installment sale with reclamation issues and walked me through Form 6252 step-by-step. What really impressed me was how they helped me document the property reclamation for tax purposes. They explained I needed to essentially "restart" my basis in the property since I was taking it back. The templates they provided for explaining the 1099-S discrepancy were straightforward and referenced the right tax codes. I just filed last week and feel much more confident that I won't face issues if I'm audited. Definitely worth it for the peace of mind alone!

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Natalie Khan

•8M

I had a nightmare trying to reach the IRS to get guidance on my 1099-S issue last year (seller defaulted after paying $3k on a $25k property). After spending hours on hold and getting disconnected multiple times, I found Claimyr https://claimyr.com and watched their demo at https://youtu.be/_kiP6q8DX5c. They got me connected to an actual IRS agent in under 20 minutes who confirmed I was handling the installment sale reversal correctly. The agent walked me through exactly how to document the discrepancy between my 1099-S and actual income, and confirmed I only needed to report the payments I actually received on Form 6252. The peace of mind from speaking directly to the IRS instead of guessing was absolutely worth it.

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Natalie Khan

•8M

It's not bypassing anything - they use automated technology to wait on hold for you. When they reach an IRS representative, they call you and connect you directly. I was skeptical too, but it's legitimate. The IRS phone systems are just completely overwhelmed, and Claimyr essentially does the holding for you instead of you having to sit there for hours. I got connected to a very helpful agent who gave me the exact guidance I needed for my installment sale documentation.

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Sienna Gomez

•8M

I have to admit I was completely wrong about Claimyr. After posting my skeptical comment, I was still struggling with my own tax situation (very similar to the original post), so I decided to give it a shot out of desperation. I was connected to an IRS agent in about 35 minutes, and they confirmed exactly how to handle my owner-financed sale where the buyer defaulted. The agent explained that I should file Form 6252 showing only the actual payments received, and attach a statement explaining why the 1099-S shows a different amount. They also explained how to adjust my basis in the property now that I've taken it back. I would have spent days researching this on my own and still wouldn't have been confident in my approach. Being able to cite direct guidance from an IRS agent gives me so much peace of mind that my return is correct.

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Kirsuktow DarkBlade

•8M

Exactly right. Each state has different laws regarding owner financing and foreclosure requirements. Some states treat these transactions like mortgages requiring judicial foreclosure, while others allow for simpler processes if you used a land contract or contract for deed. The tax implications directly tie to the legal process. If you don't properly document the default and reclamation according to your state's laws, you could have trouble justifying your tax treatment to the IRS. It's worth consulting with a real estate attorney who specializes in your state's foreclosure laws before finalizing your tax approach.

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