Todd sold some land for $600,000 in 2011. He received $100,000 as a down payment and was to receive $50,000 per year in years 2012 through 2021, in addition to the interest charged. How much income, in addition to the interest, will Todd recognize in 2011 and 2012 if he originally paid $400,000 for the land?

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The Answer is Todd's total gain on the land sale is $200,000 ($600,000 amount received - $400,000 basis). The gain represents 1/3 of the selling price ($200,000/$600,000). Thus, 1/3 of each payment must be recognized as gain. In 2011, Todd must recognize $33,333 gain (1/3 x $100,000) plus interest income received. In year 2012, he must recognize $16,667 gain (1/3 x $50,000) plus interest income received.

Todd Sold Some Land for $600,000 in 2011