Jasmine sold land for $250,000 in 2017.The land had a basis of $118,000 and she incurred selling expenses of $10,000.Jasmine received $50,000 down in 2017 and will receive five additional annual payments of $40,000 each.How much income will Jasmine recognize in 2018 when she receives the first additional payment of $40,000?

Question

Quizplus · Accepted Answer

To determine the income Jasmine will recognize in 2018, we need to calculate the gain on the sale of the land.

Sale price = $250,000
Basis = $118,000
Selling expenses = $10,000

Total gain = Sale price - Basis - Selling expenses
Total gain = $250,000 - $118,000 - $10,000
Total gain = $122,000

Jasmine received $50,000 in 2017, which reduces the remaining gain to be recognized to $72,000. Each of the five $40,000 payments will consist of a return of part of her basis (which is not taxable) and a portion of the gain (which is taxable).

For the first payment in 2018, the return of basis is calculated as:
Return of basis = (Original basis - Down payment) / Total number of payments
Return of basis = ($118,000 - $50,000) / 6
Return of basis = $11,333.33

The remaining payment of $28,666.67 is taxable as gain. Therefore, Jasmine will recognize $11,333.33 in return of basis (which is not taxable) and $28,666.67 in gain (which is taxable) for a total of $40,000 of income in 2018.

So the correct answer is C.

Jasmine Sold Land for $250,000 in 2017