Koch Realty has owned a vacant land with a FMV of $775,000 and an adjusted basis of $400,000 for more than a year. After a lengthy negotiation Koch sells the land for $800,000. Koch agrees to accept $50,000 at the time of the closing and $250,000 on the anniversary of the closing for the next 3 years. (Ignore any interest – the $250k represents principal payments).
A) What is the recognized gain if Koch does not elect the installment method?
B) What is the recognized gain for the year of sale if Koch elects the installment method?
please show calculations thank u
A- The recognized gain is 400,000 (800,000 sale vaue-400,000 adjusted basis). FMV is ignored since the sale value is greater than FMV.
B- Gain in the year of sale under installment method is $25,000.
400,000 total gain × (50,000 receipt / 800,000 sale value) = 25,000. Here we calculate the gain in proportion to the actual amount received of 50,000.
Koch Realty has owned a vacant land with a FMV of $775,000 and an adjusted basis...