The buyer and seller have tentatively agreed to a contract for the sale of a building that the buyer will use in its business.The buyer will pay the seller $100,000 (principal and interest) each year for five years.The seller's cost of the asset is $200,000, and he will report the capital gain using the installment method.The buyer and seller are now negotiating the interest rate that will be used to compute the interest included in each $100,000 payment.The relevant Federal rate is 5%, but the market rate on similar contracts is in the area is 7%.
a.Why would the seller bargain for a 5% interest rate for the contract rather than a 7%
interest rate?
b.How does the interest rate affect the buyer's future taxable income?

Question

Quizplus · Accepted Answer

The Answer of The buyer and seller have tentatively agreed to a contract for the sale of a building that the buyer will use in its business.The buyer will pay the seller $100,000 (principal and interest) each year for five years.The seller's cost of the asset is $200,000, and he will report the capital gain using the installment method.The buyer and seller are now negotiating the interest rate that will be used to compute the interest included in each $100,000 payment.The relevant Federal rate is 5%, but the market rate on similar contracts is in the area is 7%.
a.Why would the seller bargain for a 5% interest rate for the contract rather than a 7%
interest rate?
b.How does the interest rate affect the buyer's future taxable income?

The Buyer and Seller Have Tentatively Agreed to a Contract