Question

# Mrs. Yellow sold a piece of land in 2019 for \$500,000. She originally paid \$100,000 for...

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.

Sales price = \$ 500,000

Selling expenses = \$ 15,000

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

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