Question

Arnold gave land to his son, Bruce. Arnold's basis in the land was $100,000, and its fair market value at the date of the gift was $150,000. Bruce borrowed $130,000 from a bank that he used to improve the property. He sold the property to Della for $360,000. Della paid Bruce $90,000 in cash, assumed his $120,000 mortgage, and agreed to pay $150,000 in two years. Bruce's selling expenses were $10,000. Della is going to pay adequate interest.
Compute the following amounts:

a. Bruce's basis in the land at the time of the sale is $ .................. .

b. When computing his realized gain, what amount does Bruce use as the selling price and as the contract price?
Selling price: $.....................
Contract price: $.....................

c. Bruce's total realized gain on the sale is $...................., but his recognized gain in the year of the sale is $..................

Answer 1

Answer:

Explanation:

a.   Bruce's basis in the land at the time of the sale is Arnold's basis+Cost of improvement = 100,000+130,000 = $ 230,000

b.   When computing his realized gain, what amount does Bruce use as the selling price and as the contract price?

Selling price is $360,000 (given)

Contract price is $240,000

Contract price = Selling price  - Mortgage on loan = 360,000 - 120,000 = $240,000

c.   Bruce's total realized gain on the sale is $120,000 but his recognized gain in the year of the sale is $45,000

Total gain = Total selling price - Bruce's adjusted basis - Selling expenses = 360,000 - 230,000 - 10,000 = $120,000

Installment sale gain = Total gain/Contract price * Payments received = (120,000/240,000)*90,000 = $45,000