Question

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

Part A

Present Value of downpayment: $ 100,000

PV of Installment received after one year: $ 250,000 x 0.94 = $ 235,849

* PV @ 6% for 1 year is 0.94 (Just do 1/1.06)

Interest earned on late payment: $ 250,000 x 5% = $ 12,500

Tax on interest = $ 3500

Net interest income after tax: $ 9000

PV of Net interest income after tax = $ 9000 x 0.94 = $ 8491

On late payment she would recieve $ 344,340, thus not benificial.

Part B

Computation of gain
	Sale value	$350,000
	cost	$100,000
	Capital 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