Last year Salvador sold a tract of land (basis of $1 million) to Kate (an unrelated...

Last year Salvador sold a tract of land (basis of $1 million) to Kate (an unrelated party) for $4 million, with a cash down payment of $1 million and notes for the balance. The notes carry a 3.5% rate of interest and mature annually at $1 million each over three years.

Salvador did not select out of the installment method. Before any of the notes mature and when they have a fair market value of $2.8 million, Salvador dies and the notes pass to his estate. The executor sells the notes for their fair market value. What is the Federal estate and income tax result?

Expert Solution

Answer :

Given data :

market value = $ 2.8 million = $ 2,800,000.

Rate of interest = 3.5%

a) The exchange of the notes to Grace just demonstrates that the sum got on development of the notes in every year will be gotten by Grace. Before the exchange, Christian has obliged to record and report gains on a closeout of the advantage in every year. She is obligated to make good on capital increases regulatory expense on the capital additions endless supply of every portion on the grounds that upon the exchange as a blessing to Grace, she is at risk to make good on blessing government expense after an avoidance of $6,000 is made.

i.e $2,800,000 – $6,000 = $ 2,794,000

Consequently she'll be obligated to make good on blessing government expense on $2,794,000.This sum may, in any case, be balanced against the existence prohibition measure of Salvador henceforth lessening the blessing charge payable. Endless supply of the portion, Salvador will be obligated to make good on government expense risk on the earnings earned from holding the notes. This will result in an expanded evaluation on Grace.

b) For this situation, no pay charge is payable in light of the fact that the Salvador maintains a strategic distance from a blessing charge installment. The estimation of the notes, be that as it may, will be incorporated as a component of her gross home for home duty calculations just as the transfer does not yield any capital additions for the domain.

jeff jeffy answered 2 years ago

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