Verlin sells a commercial building and receives $50,000 in cash and a note for $

Question

Verlin sells a commercial building and receives $50,000 in cash and a note for $50,000 at 10% interest. Verlins adjusted basis in the building on the date of sales $40,000 and he collects only the $50,000 down payment in the year of sale.

If verlin elects to recognize the total gain on the property in the year of sale, calculate the taxable gain.

If Verlin uses the installment sale method, calculate the taxable gain he must report for the year of sale

If Verlin collects $10,000 (not including interest) of note principal in the year following year of sale, calculate the amount of income recognized under the installment sale method.

Explanation / Answer

Ans 1 Recognizes total gain in the year of sale so taxable gain= $100000-40000= $60000. The entire profit is taxable.

Ans 2 In the first year he will report taxable Income= $50000 (received)- $40000= $10000

Ans 3

So there are two type of income:

Capital gain income= $10000

Interest Income= $5000

Annual gain=Total gain/Contract price*annual payment $10000 is recognized in first year so now gain left is $50000 50000/50000*10000 So gain recognized is $10000 Note this does not include interest as that is treated ordinary Income 50000*10% for following year of sale $5000

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