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

Total selling price $ 160,000

Add: Pollys share of property taxes (6 months) paid by Kay 2,500

Less: Kays 8% mortgage assumed by Polly $55,000

Pollys refundable binder (earnest money) paid in 2011 1,000

Pollys 8% installment note given to Kay 90,000

Kays real estate commissions and attorneys 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 in interest. Her 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. The 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 Kays basis in the property was $45,000.