Question

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 2018. The terms of the sale required Pat to pay $28,000 cash, assume the $56,000 mortgage, and give Pedro 11 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 2020 note as promised, what is the recognized gain to Pedro in 2020 (exclusive of interest)

Answer 1

$64,000

Step-by-step explanation:

Calculation for the recognized gain to Pedro in 2020

First step is to calculate the Realized gain

Realized gain=($120,000+$12,000+$28,000+$56,000-$120,000)

Realized gain=$96,000

Second step is to calculate the Contract Price

Contract Price=$216,000-$56,000

Contract Price=$160,000

Now let calculate the recognized gain to Pedro in 2020

Recognized gain=$160,000-$96,000

Recognized gain=$64,000

Therefore the recognized gain to Pedro in 2020 is $64,000