Father sold land to Son for $500,000 in 2017 . Father's basis in the land was $100,000 . Son paid Father $50,000 and gave Father a note for $450,000 due in 2020 . In 2018, Son sold the land for $600,000 cash. The note bore interest at the appropriate Federal rate and both Father and Son held the land as an investment
a. Father must recognize $400,000 of income in 2018.
b. The installment method is not permitted because this is a related-party transaction.
c. Father's gain is all ordinary income.
d. Father must recognize a $360,000 gain in 2018.
e. None of the above.
d
RATIONALE: When Son sells the land, Father is required to recognize the previously unreported installment sale gain. Father's installment gain ratio is 80% [($500,000 – $100,000)/$500,000]. In 2018, Father is deemed to have collected the balance of the contract price, $450,000, and the gain recognized is $360,000 ($450,000 × .80).
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