Question

On june 30, 2023, kelly sold property for $240,000 cash and a $960,000 note due on september 30, 2024. the note pays 6% interest, which is equal to the federal rate. kelly's cost of the property was $400,000. she is concerned that congress may increase the tax rate that will apply for the year when the note is collected. kelly's after-tax rate of return on investments is 6%.

What can Kelly do to avoid the expected higher tax rate?
A) Report the entire realized gain of $240,000 in 2023.
B) Report the entire realized gain of $400,000 in 2023.
C) Continue with the installment method.
D) Sell the property at a loss.

Answer 1

The question requires an analysis of real estate and bond investments, calculating profits, understanding the relationship between risk and return, and performing simple interest calculations.

Step-by-step explanation:

The question involves understanding financial transactions, real estate investments, bond valuations, interest rates, and the associated risks and returns. When considering the scenarios provided, the different financial outcomes must be analyzed taking into account the cost of the property, the selling price, the down payment, loan details, bond yield, and the impact of fluctuating interest rates on investments.

For instance, Freda has a potential gain on her property, while Ben has increased equity and reduced his loan balance. Understanding bond valuations, as exemplified by the two-year bond with an 8% coupon rate, requires knowledge of present value calculations. The value of the bond will change based on the discount rate applied, reflecting the concept that money today is worth more than the same amount in the future due to its potential earning capacity.

It is also essential to understand that high-risk investments do not necessarily equate to low returns; rather, they can offer higher returns to compensate for the increased risk. Simple interest calculations are straightforward and illustrate the cost of borrowing or the return on a loan.