In 2010,Sophia sold real estate (adjusted basis of $500,000)for $1,500,000.Under the terms of the sale,she received two notes of $750,000 each,with 9% interest provided.One note is due in 2011 and the other in 2012.She did not elect out of the installment method of recognizing gain.In 2011 and before the first note matures,Sophia gives both notes to her adult children.At this time,the notes are worth a total of $1,400,000.Disregarding the interest element,a tax result of these transactions is:

Question

Quizplus · Accepted Answer

Sophia recognized a gain of $1,000,000 ($1,500,000 - $500,000) when she sold the real estate. Since she did not elect out of the installment method, she is required to recognize the gain as she receives payments on the notes. When she gave the notes to her adult children, who are unrelated parties, it is considered a sale or exchange. The fair market value of the notes at the time of the transfer was $1,400,000, so Sophia recognized a gain of $900,000 ($1,400,000 - adjusted basis of $500,000). Therefore, the correct answer is option C.

In 2010,Sophia Sold Real Estate (Adjusted Basis of $500,000)for $1,500,000