A taxpayer sells a rental property for $200,000 in Year 1. The basis was $120,000. The buyer pays $50,000 in Year 1 and will pay the remaining $150,000 in Year 2 with interest. What is the recognized gain in Year 1 using the installment method?

Answer options:

$80,000

$50,000

$20,000

$32,000

How to approach this question

1. Calculate Gross Profit ($80k). 2. Calculate Gross Profit Ratio ($80k / $200k = 40%). 3. Apply Ratio to Cash Received ($50k * 40% = $20k).

Full Answer

C.$20,000✓ Correct

IRC §453. Gross Profit = Selling Price ($200,000) - Basis ($120,000) = $80,000. Gross Profit Percentage = $80,000 / $200,000 = 40%. Gain Recognized in Year 1 = Payment Received ($50,000) * 40% = $20,000.

Common mistakes

Recognizing the full gain immediately or applying the wrong percentage.

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