Question: On June 30, 2007, Kelly sold property for $250,000 cash on the date of sale and a $750,000 note due on September 30, 2008. No interest was stated in the contract. The present value of the mote (using 6.5%, which was the Federal rate) was $692,625. Kelly's basis in the property was $400,000, and $40,000 of the gain was subject to depreciation recapture under § 1245. Expenses of the sale totaled $10,000, and Kelly was not a dealer in the property sold.
a. Compute Kelly's gain to be reported in 2007
b. Compute Kelly's interest income for 2008