Kay, who is not a dealer, sold an apartment house to Polly during the current year (2015). The closing statement for the sale is as follows:
Total selling price …………………………………………………………. $ 190,000
Add: Polly’s share of property taxes (6 months) paid by Kay ………………… 3,000
Less: Kay’s 8% mortgage assumed by Polly ………………… $55,000
Polly’s refundable binder (“earnest money”) paid in 2015 …….. 1,000
Polly’s 8% installment note given to Kay …………………….. 99,000
Kay’s real estate commissions and attorney’s fees ………………8,000 … (163,000)
Cash paid to Kay at closing ………………………………………………… $ 30,000
Cash due from Polly = $30,000 + $8,000 expenses ………………………. $ 38,000
During 2015, Kay collected $9,000 in principal on the installment note and $2,000 of interest. Kay’s basis in the property was $110,000 [$125,000 – $15,000 (depreciation)].
The Federal rate is 6%.
a. Compute the following:
1. Total gain.
2. Contract price.
3. Payments received in the year of sale.
4. Recognized gain in the year of sale and the character of such gain.
(Think carefully about the manner in which the property taxes are handled before you begin your computations.)
b. Same as (a) (2) and (3), except that Kay’s basis in the property was $35,000?
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