Father sold land to Son for $500,000 in 2014. Father's basis in the land was $100,000. Son paid Father $50,000 and gave Father a note for $450,000 due in 2017. In 2015, Son sold the land for $600,000 cash. The note bore interest at the appropriate Federal rate and both Father and Son held the land as an investment.

Question

Quizplus · Accepted Answer

Under the installment method for related-party transactions, any gain recognized must be ordinary income. Father's gain is $400,000 ($500,000 sale price - $100,000 basis). The gain must be recognized in the year of sale, even though the note extended the payment period. Therefore, Father must recognize $400,000 of ordinary income in 2014. In 2015, Son sold the land for $600,000 cash, so he must recognize $100,000 of gain ($600,000 - $500,000). Since Father already recognized his entire gain on the sale in 2014, there is no additional gain to recognize in 2015. Therefore, choice D is correct.

Father Sold Land to Son for $500,000 in 2014