Father sold land to Son for $150,000 in 2010.Father's basis in the land was $60,000.Son paid Father $25,000 and gave Father a note for $125,000 due in 2013.In 2011,Son sold the land for $200,000 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

The gain realized by the father on the sale of the land to his son is $90,000 ($150,000 selling price - $60,000 basis). However, since the son did not pay the entire amount in 2010, the father is allowed to use the installment method to report the gain. Under the installment method, the gain is recognized proportionally as payments are received.

In 2011, the son sold the land for $200,000 cash, which triggers the father's gain recognition. At that point, the father must recognize the entire remaining gain of $75,000 ($125,000 note value - $50,000 of principal payments received in 2011 - $60,000 basis). This gain is treated as a long-term capital gain since the father held the land for more than one year.

Father Sold Land to Son for $150,000 in 2010