Kay, who is not a dealer, sold an apartment house to Polly during 2012. The closing statement for the sale is as follows:
|
Total selling price |
|
$ 160,000 |
|
Add: Polly’s share of property taxes (6 months) paid by Kay |
|
2,500 |
|
Less: Kay’s 8% mortgage assumed by Polly |
$55,000 |
|
|
Polly’s refundable binder (“earnest money”) paid in 2011 |
1,000 |
|
|
Polly’s 8% installment note given to Kay |
90,000 |
|
|
Kay’s real estate commissions and attorney’s fees |
7,500 |
(153,500) |
|
Cash paid to Kay at closing |
|
$ 9,000 |
|
Cash due from Polly = $9,000 + $7,500 expenses |
|
$ 16,500 |
During 2012, Kay collected $4,000 in principal on the installment note and $2,000 in interest.
Her basis in the property was $70,000 [$85,000 − $15,000 (depreciation)]. The
Federal rate is 6%.
a. Compute the following:
1. Total gain.
2. Contract price.
3. Payments received in the year of sale. Recognized gain in the year of sale and the character of such gain.
(Hint: Think carefully about the manner in which the property taxes are handled before you begin your computations.)
b. Same as (a)(2) and (3), except that Kay’s basis in the property was $45,000.