Question

3. Susan sells land with a cost of $100,000 for $350,000 on August 14, 2017. The land was originally purchased on February 2, 1983. The buyer has offered to pay $100,000 down and pay the balance next year plus interest of 5%.

a. If Susan's after tax rate of return on her investments is normally 6%, determine whether she would be better off receiving installment payments or cash. Assume her income tax rate 28% for ordinary income and 15% for long term capital gains.

b. How much gain does Susan report in year 2 (assuming Susan uses the installment method)?

c. Complete Form 6252 to report the installment sale in year 1. https://www.irs.gov/pub/irs-pdf/f6252.pdf

Answer 1

	Sale value of land on 14 /08/2017	$350,000
	Purchase cost of land on 2/02/1983	$100,000
	Offer from Buyer
	downpayment	$100,000
	Balance with 5% interest next year	$262,500
	( 250000+ 5%*250000)
A.	IF installment offer accepted
		Amount		Time	PVF@ 6%	Present Value
	Downpayment recived	$100,000		0	1	$100,000
	Incremental Income
	Interest Income	$12,500
	( 250000*5%)
	Tax @28%	$3,500
	Net interest income after tax	$9,000		1	0.94	$8,491
	Instalment Received after 1year	$250,000		1	0.94	$235,849
						$344,340
	IF received Cash offer accepted then received $350000 today
	Hence it's better to revived cash today
B.	Comutation of gain
	Sale value	$350,000
	cost	$100,000
	gain	$250,000
	capital gain tax @ 15%	$37,500
	Net gain on sale of property	$212,500
	Interest income earned in next year	$12,500