1 Brian acquired a rental house in 2001 for a cost of $80,000. Straight-line dep
ID: 2581866 • Letter: 1
Question
1
Brian acquired a rental house in 2001 for a cost of $80,000. Straight-line depreciation on the property of $26,000 has been claimed by Brian. In January 2016, he sells the property for $120,000, receiving $20,000 cash on March 1 and the buyer's note for $100,000 at 10 percent interest. The note is payable at $10,000 per year for 10 years, with the first payment to be received 1 year after the date of sale.
Calculate his taxable gain under the installment method for the year of sale of the rental house.
In your computations, round any division to two decimal places
2
During the current year, Daniel James exchanges a truck used in his business for a new truck. Daniel's basis in the truck is $18,000, and the truck is subject to a liability of $8,000, which is assumed by the other party to the exchange. Daniel receives a new truck that is worth $22,000.
Recognized gain-
Basis in the new truck-
Explanation / Answer
Solution 1:
Cash $20,000
Add: Buyer’s note 100,000
Selling price $120,000
Less: the adjusted basis (54,000) (80,000 – 26,000)
Total gain realized 66,000
Contract price 120,000 (20,000 + 100,000)
Taxable gain in 2016 11,000 (66,000/120,000x $20,000)
Solution 2:
Calculation of gain recognized
Fair market value of new truck 22,000
Add: liability assumed by the buyer 8,000
Total amount realized 30,000
Less: the adjusted basis of the property given up (18,000)
Gain realized 12,000
Boot received (liability assumed by the buyer) 8,000
Gain recognized (the lesser of the gain realized or boot received) 8,000
Basis of the property received
Basis of property given up 18,000
Less: boot received (8,000)
Add: gain recognized 8,000
Basis of the property received 18,000
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