Peter sold a painting in 2012 for $100,000. Peter bought the painting in 2011 for $60,000. Peter received $30,000 in 2012 and is to receive $15,000 per year (plus interest) for 2013 through 2016. How much gain must Peter recognize in 2012?

Question

Quizplus · Accepted Answer

$3,000 ordinary income
Overall gain on sale if installment method is used: $110,000 - $25,000 = $85,000
Contract price: $110,000
Gross proﬁt percentage: $85,000/$110,000 = 77.3%
Gain recognized in 2012: $50,000 × 77.3% = $38,650 long term capital gain Gain recognized in 2013: $60,000 × 77% = $46,350 long-term capital gain
If Hal elects not to use the installment method then the recogized gain in the year of sale is an $82,000 long-term capital gain ($107,000 - $25,000 = $82,000). In 2001 when Hal collects on the note he will recognize ordinary income of $3,000 ($60,000 - $57,000 basis).

Peter Sold a Painting in 2012 for $100,000