Installment Sales
Response to the following problem:
Yvonne, a consulting engineer and cash basis taxpayer, decided to close her office and go back to college and study business. One of her business assets was a used car that she had purchased in 2012 for $15,000. She still owed $5,000 on the car when she sold it for $10,600 on June 10, 2014. The buyer agreed to assume the $5,000 note. Further, the buyer agreed to pay $1,600 as a down payment and pay $2,000 (plus 12% interest) on June 10, 2015, and $2,000 (plus 12% interest on the remaining balance) on June 10, 2016. Under the MACRS rules, Yvonne had correctly taken $9,240 of depreciation on the automobile. Assume that Yvonne has no other liabilities
a. What is the realized gain to Yvonne on the sale of the automobile?
b. If the realized gain is reported on the installment basis, how much and what type of gain will Yvonne report as income in 2014, 2015, and 2016?
c. How much interest income will Yvonne report in 2015 and 2016?
b. How much gain and what type of gain must be reported in the year of sale?
c. How much gain and what type of gain must be reported in each of the next three years?