In 2008,Sophia sold real estate (adjusted basis of $500,000)for $1,500,000.Under the terms of the sale,she received two notes of $750,000 each,with 9% interest provided.One note is due in 2009 and the other in 2010.She did not elect out of the installment method of recognizing gain.In 2009 and before the first note matures,Sophia gives both notes to her adult children.At this time,the notes are worth a total of $1,400,000.Disregarding the interest element,a tax result of these transactions is:

Question

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Sophia sold real estate for $1,500,000 with an adjusted basis of $500,000, resulting in a gain of $1,000,000. The fact that she received notes instead of cash does not change the fact that she realized a gain on the sale. Therefore, she must recognize the gain in the year of the sale, which is 2008, unless she elects out of the installment method. According to the question, she did not elect out of the installment method, so she must use it. When she transferred the notes to her adult children in 2009, she is treated as having received the FMV of the notes, which is $1,400,000. Therefore, she has received payment of $1,400,000 of the selling price, and she must recognize the gain on that portion of the sale, which is $900,000 ($1,400,000 - $500,000).

In 2008,Sophia Sold Real Estate (Adjusted Basis of $500,000)for $1,500,000