Greg Jackson, a single individual in the 39.6% bracket, sold a rental property for $530,000 in
January 2016 and paid real estate commissions and other selling expenses of $30,000. Jackson
originally purchased the property in September 2009 for $300,000 (cash) and allocated
$240,000 of the purchase price to the building and $60,000 to the land. Jackson and the buyer
did not agree to an allocation of the sales price, but he believes his original 80/20 allocation for
the building and land is appropriate. Because of the buyer’s poor credit, Jackson decided to
seller finance the sale of the property. According to the terms of the agreement, Jackson will
receive monthly principal payments along with interest. The amortization schedule that
Jackson provided shows the monthly payments of principal and interest over the ten year term.
In 2016, he will receive total principal payments of $100,000 (including the down payment) and
interest payments of $45,000. Jackson’s 2015 tax return contains a deprecation schedule that
shows accumulated depreciation of $56,200.
Like most taxpayers, Jackson is concerned about his tax bill. He wants to know if he has to
recognize the entire gain from the sale or if he can defer the gain as he receives the payments.
What amount of tax should Jackson expect to pay from the sale in 2016? The buyer will use the
property as her principal residence, and she told Jackson that they have to exchange certain
information to report on their tax returns. Jackson would like you to verify if the buyer’s
statement is correct.
Research these issues and write a letter to Greg Jackson with your response. In your letter, you
should explain the tax treatment of the sale and calculate the amount of tax he will owe in
2016. Assume Jackson will not have any other asset sales during the year (2016). His address is
500 Paredes Line, Brownsville, Texas 78521.
The sources to get the code sections are BNA(bloomberg tax center) or CCH http://intelliconnect.cch.com/scion/auth.jsp Tax center