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M sold investment real estate to B in 2020 for $100,000. M purchased the property 5...

  1. M sold investment real estate to B in 2020 for $100,000. M purchased the property 5 years ago for $60,000. The terms of the sale indicated that B was to pay $20,000 to M in 2020, $50,000 in 2021, and the remaining balance of $30,000 in 2022. M elected to use the installment method to report the gain. Assuming the payments are made as agree upon, how much gain should M report for each year?

a. 2020

b. 2021

c. 2022

Business   Accounting   
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Answer #1

As per IRS Publication 537 installment sale is a sale of property where you receive at least one of the payments for the propperty sold in an year after the tax year of the sale. If you realize a gain on an installment sale, you may be able to report part of your gain when you receive each payment. This method of reporting gain is called the installment method. If you desire, you can also choose to report all of your gain in the year of sale.

In the present case, the basis of M for the propperty sold is $60,000 and the sale price is $100,000. The total gain is therefore,  $100,000 - $60,000 = $40,000 which is = 40% [(40,000/ 100,000) * 100]

or in decimal form 0.4 (40/100).

Since M has elected to use the installment method to report the gain, the gains will be reported when each of the installment of payment will be received by him. The gains reported by M will therefore be=

2020 : $20,000 * 0.4 = $8,000

2021 : $50,000 * 0.4 = $20,000

2022 : $30,000 * 0.4 = $12,000

Total =   $40,000

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