[Oneday]

Here’s the problem:

In Year 1, a taxpayer sold real property for $200,000, receiving $100,000 at closing and $100,000 plus accrued interest at the prime rate in the next year. The buyer also assumed a $50,000 mortgage on the property. The taxpayer’s adjusted basis was $75,000, and the taxpayer incurred $10,000 of selling expenses. If this transaction qualifies for installment sale treatment, what is the gross profit on the sale?

A.

$115,000

B.

$125,000

Correct C.

$165,000

D.

$175,000

Answer for this question is C. I guessed the question by just doing regular way of calculating the profit, but I originally thought that I had to divide the $165,000 by 2 since the problem states that there will be another payment on the following year. How does applying installment sales method calculate to be $165,000?

Thank you.

[Lidis]

Hi

I am assuming here as well

The property sale is 200,000 + 50,000 mortgage = 250,000

250,000-75,000 cost of the property = 175,000

175,000 – 10,000 selling expense = 165,000 gross profit

[Anonymous]

The only time you worry about the payments is when you're trying to figure out how much of the gain to recognize in a given year. This problem just asks for the total gross profit on the sale, not how much the taxpayer will recognize each year.

[Author]

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