ExpertMedium1 markMultiple Choice
CPA · Question 32 · Area IV: Property Transactions
A taxpayer sells property for $100,000 in Year 1. The adjusted basis was $40,000. The buyer pays $20,000 in Year 1 and agrees to pay $20,000 per year for the next 4 years plus interest. What is the recognized gain in Year 1 under the installment method?
A taxpayer sells property for $100,000 in Year 1. The adjusted basis was $40,000. The buyer pays $20,000 in Year 1 and agrees to pay $20,000 per year for the next 4 years plus interest. What is the recognized gain in Year 1 under the installment method?
Answer options:
A.
$60,000
B.
$12,000
C.
$20,000
D.
$8,000
How to approach this question
1. Calculate Gross Profit (Sales Price - Basis). 2. Calculate Gross Profit % (GP / Sales Price). 3. Multiply Cash Received in current year by GP %.
Full Answer
B.$12,000✓ Correct
IRC §453. Gross Profit = $60,000. Contract Price = $100,000. Gross Profit Ratio = 60%. Payment received = $20,000. Recognized Gain = $20,000 * 0.60 = $12,000.
Common mistakes
Recognizing full gain; applying ratio to interest (interest is separate ordinary income).
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