Your client accepted the property as payment in full (the balance), so the proceeds are the income. Selling expenses would still be allowed as business deduction. It's like a body shop working on a car that is abandoned with them. It is a discounted sale. But, as one of the long gone participants here used to say, you can't write off what you didn't write on. You don't take the full amount owed as income and you don't take the discount as a deduction. When your taxpayer works on cash basis, you only deal with what actually happened, not what was supposed to happen.