Your Client, a real estate agent named John Snow, has asked you to assess the tax implications of a proposed real estate transaction.

Part A: Alternative I: John Snow is looking to sell real property located in California with a fair market value of $600,000, subject to a mortgage of $200,000, and with an adjusted tax basis of $100,000. The Buyer he is negotiating with will agree to assume the mortgage, plus provide a note in the amount of $350,000 payable over 5 years, plus a cash down payment in the amount of $50,000. Assume the first payment of the note is made in the year of sale.

Part B: Alternative II (Wrap Mortgage): Assume the same facts as above, but instead of the Buyer assuming the mortgage, the Buyer provides John Snow with a Note in the amount of $550,000. John Snow will retain the obligation under the mortgage.

Under each Alternative, calculate the following:

1. Amount and Gain realized by John Snow, he needs the gain realized amount for financial statement purposes.

2. Calculate the amount of gain John Snow would recognize in Yr. 1 and 2.

3. Assume the interest rate on the underlying mortgage is 3% and the proposed rate on the

installment note is 8%, and comment on the spread and the risk of incremental leverage.

4. Comment on how the potential for an income tax rate increase could influence the use of Seller

Financing.