Installment sale question


E

Ed Durall

I just finished teaching a course on dispositions of assets.
One of the chapters in the course is on installment sales.
I have some heartburn with one of the questions on the final
exam and have had extensive discussions with the course
developers. I was wondering if any of you would like to
whip out a blank 2002 Form 6252 and complete parts 1 and 2
for the year of the sale and let me know what you get.

Here's the question exactly as it was presented on the exam:
In 2002, Lou sold land with an adjusted basis of $50,000 for
$80,000. He incurred selling expenses of $4,000 on the
sale. The buyer assumed Lou's $20,000 mortgage on the
property and paid the selling expenses as part of the
selling price. Lou received a $5,000 payment in 2002. What
gain should be reported on his 2002 return?
A. $5,000
B. $4,000
C. $3,900
D. $2,617

Our bone of contention is how the $4,000 selling expenses
paid by the buyer should be handled. The instructions for
Form 6252 say it is "considered as a payment to the seller
in the year of the sale." Our problem lies in the
interpretation of that statement: exactly where and how
many times the $4,000 should be entered on the 6252.

Your insight would be appreciated. I'm fully prepared to
eat crow if I'm wrong.

Thanks,
Ed
 
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M

Michael T Wing CPA

Ed Durall said:
Our bone of contention is how the $4,000 selling expenses
paid by the buyer should be handled. The instructions for
Form 6252 say it is "considered as a payment to the seller
in the year of the sale." Our problem lies in the
interpretation of that statement: exactly where and how
many times the $4,000 should be entered on the 6252.
I agree that the situation as described in the question is a
bit confusing. But, my view is that $3,900 is the correct
answer. The "trick" is that the selling expenses are NOT
fully deductible in the year of sale (this is a common
misnomer). Instead, the selling expenses increase the
seller's basis, thereby reducing his gain, the consequence
of which is pro-rated over the life of the installment
contract. (If this were not the case, $2,617 would be the
correct answer.)

MTW
 
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E

Ed Durall

(If this were not the case, $2,617 would >be the correct answer.)

Thanks for the response, but I don't see how $2,617
would be an answer.
 

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