Verlin sells a commercial building and receives $50,000 in cash and a 5 year not

Question

Verlin sells a commercial building and receives $50,000 in cash and a 5 year note for $75,000/year payable at 10% interest. Verlin's adjusted basis in the building on the date of sale is $40,000 and he collects only the $50,000 down payment in the year of the sale.

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

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

C. Assuming Verlin uses the installment sale method, calculate the taxable gain he must report in the year after the sale.

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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