A taxpayer sells land (Basis $60,000) for $100,000 in Year 1. They receive $20,000 in Year 1 and a note for $80,000 payable in Year 2. They use the installment method. What is the recognized gain in Year 1?

Answer options:

$40,000

$20,000

$8,000

How to approach this question

1. Gross Profit = $40k. 2. GP % = $40k / $100k = 40%. 3. Recognized Gain = Cash Received * GP %.

Full Answer

C.$8,000✓ Correct

IRC §453. Gross Profit Ratio = Gross Profit ($40,000) / Contract Price ($100,000) = 40%. <br/>Year 1 Recognized Gain = Payment ($20,000) * 40% = $8,000.

Common mistakes

Recognizing the full gain or just the cash amount.

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