Question

Mrs. Yellow sold a piece of land in 2019 for $500,000. She originally paid $100,000 for the land. Selling costs totalled $15,000. The land is classified as capital property. The purchaser of the land paid Mrs. Yellow $80,000 in 2019, with the remainder due in the following year. Required: Calculate the taxable capital gain that Mrs. Yellow will have to include in his income for tax purposes in 2019 and 2020.

Answer 1

Sales price = $ 500,000

Selling expenses = $ 15,000

Adjusted basis = $ 100,000

Step 1:

Installment basis = Adjusted basis + Selling expenses

Installment basis = $ 100,000 + $ 15,000 = $ 115,000

Step 2:

Gross profit = Sales price - Installment basis

Gross profit = $ 500,000 - $ 115,000 = $ 385,000

Step 3:

Gross profit ratio =[ Gross profit / Sale price] X 100%

Gross profit ratio = [$ 385,000/ $ 500,000] X 100% = 77%

Step 4:

Tax year 1: Annual taxable capital gain = Payment received X gross profit ratio

Tax year 1: Annual taxable capital gain = $ 80,000 X 77% = $,61,600

Tax year 2: Annual taxable capital gain = payment outstanding X Gross profit ratio

Tax year 2 : Annual taxable capital gain = [ $ 500,000 - $ 80,000] X 77% = $ 323,400