Pedro, not a dealer, sold real property that he owned with an adjusted basis of $120,000 and encumbered by a mortgage for $56,000 to Pat in 2015 . The terms of the sale required Pat to pay $28,000 cash, assume the $56,000 mortgage, and give Pedro eleven notes for $12,000 each (plus interest at the Federal rate). The first note was payable two years from the date of sale and each succeeding note
became due at two-year intervals. Pedro did not "elect out" of the installment method for reporting the transaction. If Pat pays the 2017 note as promised, what is the recognized gain to Pedro in 2017 (exclusive of interest)?
a. $12,000
b. $7,200
c. $4,800
d. $0
e. None of the above
b
RATIONALE: The realized gain on the sale is $96,000 ($132,000 + $28,000 + $56,000 – $120,000). The contract price is $160,000 ($216,000 amount realized – $56,000 mortgage assumed). The recognized gain is calculated as follows for 2017:
× $12,000 = $7,200
Since the mortgage assumed of $56,000 does not exceed the adjusted basis of $120,000, there is no deemed payment problem in 2015.
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