LO4 6 Floyd a cash basis taxpayer has received an offer to p

LO.4, 6 Floyd, a cash basis taxpayer, has received an offer to purchase his land. The cash basis buyer will pay him either $100,000 at closing or $50,000 t

Solution

Solution: The instalment sale is better because it will allow Floyd to move income to a lower tax section, and additionally defer tax on one-portion of the gain.

Working:

Option 1- Sell for cash

Cash received

100,000

Less: basis

-20,000

Recognized gain

80,000

Tax @ .25

20000

After-tax proceeds ($100,000 - $20,000)

80,000

Compounded 1 year: {1 + [(1 - .20) *.10]}

86400

86,400

Option 2 – Installment sale

Cash received: year 1

50,000

Gross profit % = ($100,000 - $20,000)/$100,000 =

0.8

Recognized gain

40000

Tax @ .25

10000

After-tax proceeds ($50,000 - $10,000)

40,000

Compounded 1 year: {1 + [(1 - .20) *.10]}

43200

43,200

Cash received: year 2

56,000

56,000

Interest: imputed at 4% * $56,000

2240

Tax on interest @ .20

448

-448

Sales proceeds

50,000

Gross profit % = ($100,000 - $20,000)/$100,000 =

0.8

Taxable gain

40000

Tax @ .20

8000

-8000

Total future value

90,752

Option 1- Sell for cash
Cash received	100,000
Less: basis	-20,000
Recognized gain	80,000
Tax @ .25	20000
After-tax proceeds ($100,000 - $20,000)	80,000
Compounded 1 year: {1 + [(1 - .20) *.10]}	86400	86,400
Option 2 – Installment sale
Cash received: year 1	50,000
Gross profit % = ($100,000 - $20,000)/$100,000 =	0.8
Recognized gain	40000
Tax @ .25	10000
After-tax proceeds ($50,000 - $10,000)	40,000
Compounded 1 year: {1 + [(1 - .20) *.10]}	43200	43,200
Cash received: year 2	56,000	56,000
Interest: imputed at 4% * $56,000	2240
Tax on interest @ .20	448	-448
Sales proceeds	50,000
Gross profit % = ($100,000 - $20,000)/$100,000 =	0.8
Taxable gain	40000
Tax @ .20	8000	-8000
Total future value		90,752