Father sold land to Son for $500,000 in 2016.Father's basis in the land was $100,000.Son paid Father $50,000 and gave Father a note for $450,000 due in 2019.In 2017,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 related-party rules, the installment method is not allowed for sales of property between related parties. Therefore, Father must recognize the entire gain of $400,000 ($500,000 selling price minus $100,000 basis) in the year of the sale, which is 2016. The fact that Son paid only $50,000 in cash and gave a note for the remainder does not change the treatment of the sale. When Son sells the property in 2017 for $600,000, he will have a gain of $100,000 ($600,000 selling price minus $500,000 purchase price). The interest income that Father receives from the note is recognized separately as it accrues over the term of the note.

Father Sold Land to Son for $500,000 in 2016