Question

Jake sold an office building in Year 1 on the installment method for $5.5 million. At the end of Year 2, he is still owed $4.9 million on the debt from the sale. In which situation will Jake have to pay interest on the deferred tax of his Year 2 sales if they are all installment sales with no payments in Year 2?

Answer 1

When it is considered that Jake sells a rental duplex at $160,000 and also a complex apartment at $4.9 million.

Step-by-step explanation:

For any type of property that is over $150,000, Section 453A provides that interest should be charged on the deferred tax of nondealear installment sales.

Interest will have to be paid only if the obligation is still outstanding and the total of the nondealer installment receivables is more than $5 million.

Therefore, Jake is considered to have sold a rental duplex at $160,000 and also a complex apartment at $4.9 million, and this will make his Year 2 installment sales (in receivables at year end) yo be greater than $5 million. This makes it compulsory for interest to be charged on the deferred tax.