Father sold land to Son for $500,000 in 2015.Father's basis in the land was $100,000.Son paid Father $50,000 and gave Father a note for $450,000 due in 2018.In 2016,Son sold the land for $600,000 cash.The note bore interest at the appropriate Federal rate and both Father and Son held the land as an investment.

Question

Quizplus · Accepted Answer

Under the related-party rules, the installment method is not available for reporting gain on the sale of property between family members. Therefore, Father must recognize the entire gain in the year of the sale, which is $500,000 - $100,000 = $400,000. However, since Son paid $50,000 in cash in 2015, this reduces Father's gain to $400,000 - $50,000 = $350,000. The interest income received by Father on the note is reported separately from the gain on the sale. Therefore, Father must recognize a $360,000 gain in 2016, which is the amount realized of $600,000 minus the adjusted basis of $240,000 ($100,000 + $100,000/3) after taking into account the $50,000 payment received in 2015.

Father Sold Land to Son for $500,000 in 2015