Question

Ken sold a rental property for $860,000. He received $128,000 in the current year and $183,000 each year for the next four years. Of the sales price, $582,500 was allocated to the building and the remaining $277,500 was allocated to the land. Ken purchased the property several years ago for $660,000. When he initially purchased the property, he allocated $570,000 of the purchase price to the building and $90,000 to the land. Ken has claimed $15,000 of depreciation deductions over the years against the building. Ken had no other sales of §1231 or capital assets in the current year. For the current year, determine the amount of Ken's total recognized gain or loss. For the current year, determine the character of the gain or loss and calculate Ken’s total tax due because of the sale (assuming his marginal ordinary tax rate is 32 percent).

For the current year, determine the amount of Ken's total recognized gain or loss. (Round your final answers to the nearest whole dollar amount. Input all the values as positive numbers.)

	Description Amount (1) Amount Realized $860,000 (2) Adjusted Basis (3) Gain realized (4) Gross Profit Percentage % (5) Payment received in year 0 $128,000 Gain/loss recognized in year 0

Answer 1

The sale of rental property qualifies as an installment sale.

As a result, in the year of sale Ken has a §1231 gain of $15,000 taxed at a maximum 25% rate. He also has a §1231 gain of $17,000 taxed at a maximum 15% rate. In the year of the sale, Ken's tax liability is $6,300. The unrecaptured §1250 gain is recognized before any of the §1231 gain (as indicated by the regulations). The remaining gain is taxed in subsequent years. The computation for the current year is as follows:

	Description	Amount	Explanation
1	Amount Realized	860,000	Given
2	Adjusted Basis	645,000	= $660,000 - $15,000
3	Gain Realized	215,000	= $860,000 - $645,000
4	Gross Profit Percentage	25%	= $215,000/860,000 * 100
5	Payment received in year 0	128,000	Given
	Gain/loss recognized in year 0	32,000	(i) ($128,000 * 25%),      (ii) Out of $32,000, $15,000 of unrecaptured §1250 and $17,000 §1231 gain

Character	Amount ($)	Rate	Tax ($)
Unrecaptured §1250 ( §1231 gain)	15,000	25%	3,750
Other §1231 gain	17,000	15%	2,550
Tax			6,300