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On Dec. 31, 2020, Mary sold a piece of investment land for $1M (basis = $100,000)....

On Dec. 31, 2020, Mary sold a piece of investment land for $1M (basis = $100,000). Mary received $100,000 cash on Dec. 31, 2020 and a $900,000 note. The note calls for three annual installment payments of 300K beginning in 2021 and provides for annual interest payments (at market rate, beginning in 2021).

Mary will use the installment sale method to report her taxable gain. In 2021, Mary receives a $300,000 installment payment on the note plus $36,000 interest on the note. What amount of gross income will Mary report in 2021?

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Answer #1

Since Mary has opted for the Installment Sale method to report taxable gain (she is qualified since she received the first installment within 1 year of the sale and provided she filled out the necessary tax forms), her gross income will include taxable gain as per the installment sale method plus the interest income.

The annual gain from the sale of investment piece of land is computed as follows:

Annual Gain = (Total Gain/Contract Price)*Annual Payment
= ((1,000,000 - 100,000)/1,000,000)* 300,000
= $ 270,000.00
Gross Income for 2021
Taxable gain (as computed above) $ 270,000.00
Interest income $    36,000.00
Gross taxable income $ 306,000.00
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