Hal sold land held as an investment with a fair market value of $100,000 for $36,000 cash and a note for $64,000 that was due in two years.The note bore interest of 7% when the applicable Federal rate was 4%.Hal's cost of the land was $40,000.Because of the buyer's good credit record and the high interest rate on the note, Hal thought the fair market value of the note was at least $74,000.

Question

Quizplus · Accepted Answer

Since the note's fair market value is greater than its face value, Hal is treated as receiving payments in excess of the amount due under the installment method. Therefore, he is required to recognize gain on the excess payments. In this case, Hal can elect to use the installment method and recognize gain as payments are received. The first year's gain is calculated by multiplying the total gain ($60,000) by the percentage that the cash received ($36,000) bears to the total sales price ($100,000), which is 36%. Therefore, Hal must recognize $21,600 gain in the year of sale.

Hal Sold Land Held as an Investment with a Fair