A cash basis taxpayer sold investment land in 2016 for $200,000. He received $40,000 in the year of sale and $160,000 in 2017. The cost of the land was $80,000. Under the installment method, the taxpayer would report a $24,000 gain in 2016.

Question

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The installment method allows taxpayers to report the gain from the sale of property over the years in which the payments are received. The gain recognized in the year of sale is the proportion of the total gain equal to the ratio of the down payment to the total sale price. In this case, the down payment is $40,000 and the total sale price is $200,000, so the gain recognized in 2016 is ($40,000/$200,000) x ($200,000 - $80,000) = $24,000.

A Cash Basis Taxpayer Sold Investment Land in 2016 for $200,000