Question

Treyton sold an apartment building for $600,000. His basis in the building was $360,000 subject to $30,000 of depreciation recapture. Treyton received $150,000 in the year of sale, the buyer assumed Treyton’s mortgage payable of $240,000, and the buyer gave Treyton an 8% (the current Federal rate) note of $210,000 due in five years. The interest on the note was payable each June 30 beginning in the year following the year of the sale. Treyton incurred $30,000 of selling expenses which he paid for in the year of sale. Compute Treyton’s installment sales gain that should be reported in the year of sale.

Answer 1

Answer :-

Treyton’s installment sales gain that should be reported in the year of sale are as follows -

We first calculate the gross profit ratio

Particular	Amount
Selling Price of building	$600,000
Less :- Selling Expense paid in the year of sale	($30,000)
Less :- Basis in the building	($360,000)
Total Gain	$210,000
Less :- Depreciation recapture	($30,000)
Installment Gain in sale	$180,000
We calculate the Contract Price :-
Selling Price of building	$600,000
Less :- Buyer assumed John Mortgage Liability	($240,000)
Contract Price	$360,000

Gross Profit Ratio = Installment gain in sales /Contract Price

Gross Profit ratio = $180,000 /$360,000

Gross Profit ratio = 0.50

Now we calculate the Total gain in the year of sale

Particular	Amount
Gain in year of sales are -
Installment Gross profits (Amount received in the year of sale × Gross profit ratio = $150,000 × 0.50)	$75,000
Depreciation recapture	$30,000
Total Gain in the year of sale	$105,000