Matt King sells a rental house on 1st January, 2012 and receives $130,000 cash and a note for $55,000 at 10 percent interest. The purchaser also assumes the mortgage on the property of $45,000. Matt's adjusted basis in the house on the date of sale is $152,500 (no depreciation) and he collects only the $130,000 down payment in the year of sale.
(a) Matt elects to identify the total gain on the property in the year of sale, compute the taxable gain:
Cash $130,000
Add: buyer's note 55,000
Selling price $230,000
Mortgage assumed by the purchaser 45,000
Less: Matt's basis in the house (152,500)
Total gain $77,500
Contract price (130,000 + 55,000) $185,000
Taxable gain = 77,500/185,000 x 130,000 $54,459