LO.4 Kay, who is not a dealer, sold an apartment house to Polly during the current year (2012). The closing statement for the sale is as follows:

Total selling price $ 160,000 Add: Polly’s share of property taxes (6 months) paid by Kay 2,500 Less: Kay’s 8% mortgage assumed by Polly $55,000 Polly’s refundable binder (“earnest money”) paid in 2011 1,000 Polly’s 8% installment note given to Kay 90,000 Kay’s real estate commissions and attorney’s fees 7,500 (153,500)

Cash paid to Kay at closing $ 9,000 Cash due from Polly = $9,000 + $7,500 expenses $ 16,500 During 2012, Kay collected $4,000 in principal on the installment note and $2,000 of interest.

Kay’s basis in the property was $70,000 [$85,000 − $15,000 (depreciation)]. The Federal rate is 6%.

a. Compute the following:

1.

Total gain.

2.

Contract price.

3.

Payments received in the year of sale.

4.

Recognized gain in the year of sale and the character of such gain.

(Hint: Think carefully about the manner in which the property taxes are handled before you begin your computations.)

b. Same as (a)(2) and (3), except that Kay’s basis in the property was $45,000.