Question

A few years ago, you purchased 2,000 shares of ABC Corp. for $105,000. During the current year, you received $1,000 in dividends, and then sold the shares to a friend for $120,000, ($40,000 up front, and $40,000 in each of the next two years). How much taxable income associated with these shares will you claim in the current year?

Answer 1

Dividend received during the year = $1,000

This sales is installment sales.

Total long term capital gain = $120,000 - $105,000 = $15,000

Sale value realized this year = $40,000 and balance $80,000 to be realized over two years at $40,000 each year.

The reporting gain this year = $15,000 * (40,000 / 120,000) = $5,000

Taxable income associated with these shares you claim in the current year = Dividend received + Reporting gain this year

= $1,000 + $5,000 = $6,000

Taxable income associated with these shares you claim in the current year = $6,000