Tim sells land to Brad for $90,000. Tim originally purchased the land for $50,000. Brad agrees to pay Tim six annual installments of $15,000 each. In year three, Brad makes his third installment of $15,000. How much taxable gain will Tim recognize in year three?

Question

Quizplus · Accepted Answer

To calculate the taxable gain, we need to first determine the total amount of gain Tim makes from the sale. Tim sold the land for $90,000, but initially purchased it for $50,000, giving him a gain of $40,000.

Since Brad is paying in installments, we need to use the installment sales method to determine how much taxable gain Tim will recognize in year three.

To do this, we need to first calculate the gross profit percentage, which is the gain divided by the total contract price. In this case, the contract price is $90,000 (even though it is being paid in installments), and the gain is $40,000, so the gross profit percentage is 44.4%.

Next, we need to determine how much of Brad's payments in year three can be applied to the gain. Since Brad is making a $15,000 payment, we can multiply that by the gross profit percentage to determine how much of the payment is taxable gain. In this case, $15,000 multiplied by 44.4% equals $6,667.

Therefore, the taxable gain that Tim will recognize in year three is $6,667.

Tim Sells Land to Brad for $90,000