Steven sells land at a cost of 100000 for 350000 on August 1

Steven sells land at a cost of $100,000 for $350,000 on August 14, 2017. The land was originally purchased on February 2, 1983. The buyer has offered to pay $100,000 down and pay the balance next year plus interest of 5%.

A. If Steven\'s after-tax rate of return on his investments is normally 6%, determine whether he would be better off receiving installment payments or cash. Assume his income tax rate 28% for ordinary income and 15% for long-term capital gains.

B. How much gain does Steven report in year 2 (assuming Steven uses the installment method)

Solution

Sale value of land on 14 /08/2017 $350,000 Purchase cost of land on 2/02/1983 $100,000 Offer from Buyer downpayment $100,000 Balance with 5% interest next year $262,500 ( 250000+ 5%*250000) A. IF installment offer accepted Amount Time PVF@ 6% Present Value Downpayment recived $100,000 0 1 $100,000 Incremental Income Interest Income $12,500 ( 250000*5%) Tax @28% $3,500 Net interest income after tax $9,000 1               0.94 $8,491 Instalment Received after 1year $250,000 1               0.94 $235,849 $344,340 IF received Cash offer accepted then received $350000 today Hence it\'s better to revived cash today B. Comutation of gain Sale value $350,000 cost $100,000 gain $250,000 capital gain tax @ 15% $37,500 Net gain on sale of property $212,500 Interest income earned in next year $12,500