Question

Iatructions d) (5) (1) - Saved to this PC eview View Help Search - ЕЕ 20 ДАавьссі | Аавьсср Аавьс. Аавьссс. Аав Аавы 1 Normal 1 No Spac... Heading 1 Heading 2 Title Subt Paragraph Styles this is not a formal writing assignment, current APA format is not required. thermore, there is no need to submit a title page or research page. Just include your 1 name at the top of first sheet. oblems 1. Julia currently is considering the purchase of some land to be held as an investment. She and the seller have agreed on a contract under which Julia would pay $1,000 per month for 60 months, or $60,000 total. The seller, not in the real estate business, acquired the land several years ago by paying $10,000 in cash. Two alternative interpretations of this transaction are (1) a price of $51.726 with 6 percent interest and (2) a price of $39,380 with 18 percent interest. Which interpretation would you expect each party to prefer? Why?

Answer 1

Refer to the below images for the above asked questions, in a detailed way to solution with explanation.

If alternative loption on the seller & buyer one as choosen, the effects Solution : are as follows: seller: particulars Total capital Interest income gain (151726 - $ 16000) ($60,000 -45 1726) Amount $4172 98274 Buyor: Basis $51726 8274 Interest deduchion It alternative a, is chosen the effects on the seller & buyer are particolars Toral capital gain (439 380 - $10000) Interest income (460000 - 439380) Amount $29.380 Seller: $ 20610 Buyer: Basis Interest deduction $31380 $20620 Assuming that the original issue discount roles do not apply. the seller would prefer alternative under this alternative the seller would recognize a larger amount of capital gain, income, which can be offset against Capital losses and may subject to a lower tax rate and would recognize less interest income, which is fully taxable.

The buyer would prefer alternative 2, because the contract derms would result in a greater amount of interest deduction and a lesser cost for the land. Assuming that the investment interest deduction limitations are satisfied, the interest is deductible against ordinary income when it is paid. In contrast, the cost of land is capitalized and can be deducted only against capital gain income when the land is sold - - -

Workings: Alternative ou contractual agreed price Monthly payments Total months of period Taxes per installment Gaxes per year Jelling price Basis of seller Total gain (seller) Interest income (seller) Deduction for interest (buyer) Basis of golia (boyer) & 60000 f 1000 66 months $ 695.43 98345.20 & 51726 4 10000 & 41726 8274 & ARTY $51726 Alternative : 60000 $ 1000 12 contractual agreed price Monthly payments No. of nonths Honths in a year Gaxes per installment saxes per year Telling price Basis of seller Total gain (selter) Interest income (selter) Deduction for interest (bopex) Basis of Jolia (boyer) $489.67 $5876.00 $39380.00 10000.00 $29380.00 120620.00 $20620.oo 3938000