Brenda sold investment land for $200,000 in June. Her basis in the land was $75,000. The purchaser paid Brenda $40,000 cash and gave her his 5-year, interest-bearing note for the $160,000 remaining contract price. In December, Brenda received a $20,000 principle payment on the note. Brenda's recognized gain this year is:

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Brenda's recognized gain is determined by subtracting her basis from the amount realized, which is $200,000 - $75,000 = $125,000. However, she only received $40,000 in cash this year, so that is the only amount that is recognized as gain for tax purposes. Therefore, her recognized gain is $40,000. The $20,000 principle payment on the note is considered a return of capital and doesn't impact her recognized gain this year. The remaining $120,000 of the contract price will be recognized as gain in the years in which she receives principle payments on the note. The recognized gain for those payments will be calculated by dividing the remaining gain ($125,000 - $40,000 = $85,000) by the total contract price ($160,000) and multiplying by the amount of each principle payment.

Brenda Sold Investment Land for $200,000 in June