ExpertMedium1 markMultiple Choice
CPA · Question 64 · Area IV: Property Transactions
Taxpayer sells land (Basis $60,000) for $100,000. Terms: $20,000 cash in Year 1, and an $80,000 note payable in Year 2. What is the recognized gain in Year 1 under the installment method?
Taxpayer sells land (Basis $60,000) for $100,000. Terms: $20,000 cash in Year 1, and an $80,000 note payable in Year 2. What is the recognized gain in Year 1 under the installment method?
Answer options:
A.
$40,000
B.
$8,000
C.
$20,000
D.
$0
How to approach this question
1. Gross Profit = $100k - $60k = $40k. 2. Gross Profit % = $40k / $100k = 40%. 3. Year 1 Gain = Cash Received ($20k) * 40% = $8,000.
Full Answer
B.$8,000✓ Correct
B
IRC §453. Gross Profit Ratio = ($40,000 Gain / $100,000 Price) = 40%. Recognized Gain = Payment ($20,000) * 40% = $8,000.
Common mistakes
Recognizing the full cash received as gain.
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