Father sold land to Son for $500,000 in 2017. Father's basis in the land was $100,000. Son paid Father $50,000 and gave Father a note for $450,000 due in 2020. In 2018, 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

Father's realized gain on the sale was $500,000 (amount realized) - $100,000 (basis) = $400,000. Since the note was sold in a related-party transaction, the installment method is not available. Therefore, Father must recognize a gain of $400,000 in the year of sale (2018). The gain is a long-term capital gain since Father held the land as an investment for more than one year. The amount of the gain that is taxable in 2018 is $360,000 ($400,000 x [$600,000 - $50,000]/$500,000).

Father Sold Land to Son for $500,000 in 2017