Question

Mark has decided to retire and sell his business. The primary asset used in the business is a retail building with an adjusted basis of $200,000. A prospective buyer has offered to pay Mark $500,000 for the building but only has $150,000 cash available. The buyer has offered to give Mark a note for the rest of the purchase price, $350,000. Starting in the year after the sale, the buyer will pay Mark $35,000 per year on the note plus interest at a rate higher than what Mark could otherwise get on his investments.

How much gain would Mark recognize on the proposed sale in the year of sale?

Answer 1

Mark would recognize a gain of $300,000 on the sale of his business's retail building, calculated as the selling price ($500,000) minus the adjusted basis ($200,000). The transaction's payment method does not affect the recognized gain in the year of the sale.

Step-by-step explanation:

Mark would recognize gain of $300,000 in the year of the sale of his retail building. The gain is calculated as the difference between the selling price of the asset ($500,000) and its adjusted basis ($200,000).

While the buyer is offering to pay with $150,000 in cash and a promissory note for the remaining $350,000, the entire $500,000 counts towards the amount realized on the sale in the year of the sale. The installment agreement does not change the total gain recognized, but it would affect when Mark reports the income for tax purposes. Given that the question did not specify treating this as an installment sale, we are calculating the gain in the year of sale.