LO.4 On June 30, 2012, Kelly sold property for $240,000 cash and a $960,000 note due on

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LO.4 On June 30, 2012, Kelly sold property for $240,000 cash and a $960,000 note due on September 30, 2013. The note will also pay 6% interest, which is slighty higher than the Federal rate. Kelly’s cost of the property was $400,000. She is concerned that Congress may increase the tax rate that will apply when the note is collected. Kelly’s after-tax rate of return on investments is 6%.

a. What can Kelly do to avoid the expected higher tax rate?

b. Assuming that Kelly’s marginal combined Federal and state tax rate is 25% in 2012, how much would the tax rates need to increase to make the option identified in (a)

advisable?

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