Contract for Deed returned

[JackieCPA]

Hi Everyone! I have an odd situation with a new client. I guess I am unsure of what to do.

In 2016, he started a contract for deed on a property. His prior tax preparer took the entire gain in that year and has just been taking the interest income going forward. 

They are stopping the contract for deed because the person making the payments is expected to pass away within the next couple of months. His plan with his lawyer is to give her the $15,000 down payment back and consider all of the payments made in 2020 as rent as he is going to let her stay in the house until she passes.  My question then is, basis, when he resells the property what is his basis going to be? If this was set-up as an installment sale at the get-go I would be able to figure this out easier, however, being they took the entire gain in the first year I am unsure about what to do. 

I've been doing research but haven't found anything directly for this type of situation. Any help or links would be much appreciated!

Hope everyone is staying healthy (and sane!)

[DANRVAN]

It will depend on how the return of the down payment and cancellation of the contract are accounted for.

I don't believe reg 1.1038-1 will apply (whether recognized as installment sale or not)  since the transaction did not involve a repossession or default.

At a glance, it  appears the seller bought back the property and basis would be the consideration he paid for it  

Sale price (consideration) would then be the $15,000 returned plus the outstanding principal on the note.

If consideration given was less than fmv then maybe gifting involved.

Did the attorney draw up any papers in regards to the transfer back to seller?

I am also thinking there should be a closing report if title is going going back to client?

Hope this helps.