Hal sold land held as an investment with a fair market value of $100,000 for $36,000 cash and a note for $64,000 that was due in two years.The note bore interest of 11% when the applicable Federal rate was 7%.Hal's cost of the land was $40,000.Because of the buyer's good credit record and the high interest rate on the note, Hal thought the fair market value of the note was at least $74,000.

Question

Quizplus · Accepted Answer

Since Hal received a note as part of the payment, he can use the installment method for reporting his gains. To calculate the gain to be reported in the year of sale, we need to find the gross profit ratio which is calculated as follows:
Gross Profit Ratio = (Selling Price - Cost) / Selling Price 
= (36,000 + 64,000 - 40,000) / 100,000 
= 0.6 or 60%
Using the gross profit ratio, Hal can calculate the gain to be reported in the year of sale as follows:
Gain in Year of Sale = Installment Payment Received x Gross Profit Ratio 
= 36,000 x 60% 
= $21,600
Therefore, unless Hal elects not to use the installment method, he must recognize $21,600 gain in the year of sale.

Hal Sold Land Held as an Investment with a Fair