Study Unit 10: Related Parties, Business Property, and Installment Sales

1. Larry sold stock with a cost basis of $10,500 to his son for $8,500. Larry cannot deduct the $2,000 loss. His son sold the same stock to an unrelated party for $15,000, realizing a gain. What is his son’s reportable gain?

$6,500.

$4,500.

$2,000.

No gain.

2. Jim sells stock that he purchased in 2012 to his brother John for a $500 loss. He also sells a truck purchased in 2023 to ABC Corporation, his 100%-owned C corporation, for a profit of $800, including $500 of depreciation recapture. What is the effect of these transactions on Jim’s 2025 tax return?

A loss of $500 on the stock and no gain on the truck.

A disallowed loss on the stock, $500 ordinary gain, and $300 long-term capital gain on the truck.

A loss of $500 on the stock and $800 ordinary gain on the truck.

A disallowed loss on the stock and $800 ordinary gain on the truck.

3. Robert sold his Lebec Corporation stock to his sister Karen for $8,000. Robert’s cost basis in the stock was $15,000. Karen later sold this stock to Dana, an unrelated party, for $15,500. What is Karen’s realized gain?

$500

$7,000

$7,500

4. Geena paid $10,000 for stock in a start-up company. A few months after she bought it, she sold the stock to her brother Henry for $8,000, its current value. Later, he sold the stock to an unrelated party for $15,000. What gain or loss should Geena and Henry recognize on their tax returns in the year of sale?

Geena recognizes $2,000 loss; Henry recognizes $7,000 gain.

Geena recognizes $2,000 loss; Henry recognizes $5,000 gain.

Geena recognizes $0 loss; Henry recognizes $7,000 gain.

Geena recognizes $0 loss; Henry recognizes $5,000 gain.

5. In May of the current year, Automatic, Inc., sold land with a basis to Automatic of $10,000 to Jack, its 60% shareholder, for $8,000. In July, Jack sold the land to an unrelated party for $11,000. What is the amount of Jack’s recognized gain?

$1,000

$2,000

$3,000

6. Mark owned 100% of the stock in Gathers Corporation. In 2025, Gathers Corporation sold a computer with an adjusted basis of $5,000 and a fair market value of $8,000 to Mark’s Uncle Seth for $4,000. What is the amount of Gathers Corporation’s deductible loss on the sale of this computer in 2025?

$(4,000)

$(3,000)

$(1,000)

7. Mr. Smith decided to retire from his business in 2025. Included in his assets was a large delivery truck for which he had paid $35,000 in 2021. Mr. Smith had offers to buy his truck for $25,000 from two local truck dealers. He decided instead to sell his truck for $15,000 to his long-time employee, John Pine, as partial compensation for John’s helping Mr. Smith wind up his business. What is John’s basis in the truck?

$35,000.

$25,000.

$15,000.

None of the answers are correct.

8. Frank sold his Ranier Corporation stock to his sister Bernie for $8,000. Frank’s cost basis in the stock was $15,000. Bernie later sold this stock to Wendy, an unrelated party, for $15,500. What is Bernie’s recognized gain or loss?

$500

$(7,000)

$7,500

9. In April 2025, Pamela sold stock with a cost basis of $15,000 to Lisa, her sister, for $10,000. In September 2025, Lisa sold the same shares of stock to their cousin, Niki, for $8,000. What is the amount of Pamela’s deductible loss for 2025?

$2,000

$5,000

$7,000

10. In February 2025, Auto Repair, Inc., sold a car with a basis of $12,000 to Mark, its 55% shareholder, for $10,000. In June 2025, Mark sold the car to an unrelated party for $15,000. What is the amount of Mark’s recognized gain?

$2,000

$3,000

$5,000

11. Sue sold land to her brother Sam for $6,000. Sue’s basis in the land was $7,000. She cannot deduct the $1,000 loss. Sam sold the same land to an unrelated party for $5,500, realizing a loss of $500. What amount of loss can Sam deduct?

$500

$1,500

$1,000

12. Alf owns all of the shares of Waxman Corporation, a manufacturer of finished leather products. Alf also owns a 60% partnership interest and his friend Richard owns a 40% partnership interest in York Real Estate Rentals, LLC. York owns and leases warehouse space to numerous businesses. In 2025, York sold a building with an adjusted basis of $100,000 to Waxman for $80,000. What is the amount of York’s deductible loss in 2025 from this transaction?

$(20,000)

$(12,000)

$(8,000)

13. Among which of the following related parties are losses from sales and exchanges recognized for tax purposes?

Grandfather and granddaughter.

Father-in-law and son-in-law.

Brother and sister.

Lineal descendants.

14. On July 1 of the current year, Daniel Wright owned stock (held for investment) purchased 2 years earlier at a cost of $10,000 and with a fair market value of $7,000. On this date, he sold the stock to his son, William, for $7,000. William sold the stock for $6,000 to an unrelated person on November 1 of the current year. How should William report the stock sale on his current-year tax return?

As a short-term capital loss of $1,000.

As a long-term capital loss of $1,000.

As a short-term capital loss of $4,000.

As a long-term capital loss of $4,000.

15. Allen sold stock, a capital asset, he had purchased for $40,000 to his granddaughter Alice for $30,000. Later, Alice sold the stock to an unrelated party for $45,000. What is the amount of Alice’s recognized gain?

$5,000

$10,000

$15,000

16. In May, Evan sold stock with a cost basis of $15,000 to Gina, his sister, for $13,500. In October, Gina sold the same shares of stock to their cousin, Diane, for $10,000. What is the amount of Gina’s deductible loss for the year?

$1,500

$2,500

$3,500

17. In March, Marcia sold stock with a cost basis of $12,000 to Lea, her sister, for $10,500. In October, Lea sold the same shares of stock to their cousin, Natalie, for $8,750. What is the amount of Lea’s deductible loss for the year?

$1,500

$1,750

$3,250

18. Gregory sold his stock in a corporation to his sister for $9,000. His cost basis in the stock was $17,000. His sister later sold the stock to an unrelated party for $19,500. What is his sister’s realized gain?

$10,500

$2,500

$8,000

19. Taxpayers Rita and Bernard are in the process of executing a divorce agreement, which will include a property settlement. Under the property settlement, Bernard will transfer stock with a basis of $50,000 and a FMV of $30,000 to Rita. What is the tax consequence of this transaction to Bernard’s income, and what is Rita’s basis in the stock?

Bernard’s income

$20,000 loss

Rita’s basis

$30,000

Bernard’s income

$20,000 gain

Rita’s basis

$50,000

Bernard’s income

$0 gain (loss)

Rita’s basis

$30,000

Bernard’s income

$0 gain (loss)

Rita’s basis

$50,000

20. Gibson purchased stock with a fair market value of $14,000 from Gibson’s adult child for $12,000. The child’s cost basis in the stock at the date of sale was $16,000. Gibson sold the same stock to an unrelated party for $18,000. What is Gibson’s recognized gain from the sale?

$2,000

$4,000

$6,000

21. Conner purchased 300 shares of Zinco stock for $30,000 in 2005. On May 23, 2025, Conner sold all the stock to his daughter Alice for $20,000, its fair market value at the time. Conner realized no other gain or loss during 2025. On July 26, 2025, Alice sold the 300 shares of Zinco for $25,000. What was Alice’s recognized gain or loss on her sale?

$5,000 long-term gain.

$5,000 short-term loss.

$5,000 long-term loss.

22. During 2025, Nicholas made the following dispositions of property:

Sold publicly traded stock, which cost $2,000 and had been held for 2 years, for $3,000
Sold land, which cost $20,000 and had been held for 9 months, to his brother for $16,000

How should Nicholas report these dispositions on his 2025 return?

$1,000 long-term capital gain.

$3,000 long-term capital loss.

$3,000 short-term capital loss.

$3,000 ordinary loss.

23. Allen purchased a trademark on January 1 of last year for $150,000 and began amortizing it over the required 15-year period. On January 2 of this year, Allen sold the trademark for $200,000. How much of Allen’s gain on the sale of the trademark is Sec. 1245 gain?

$5,000

$10,000

$50,000

$60,000

24. Which of the following assets will NOT qualify for gain or loss treatment under Sec. 1231?

Factory machine acquired March 1, 2024; sold August 1, 2025.

Land used as a parking lot acquired August 1, 2024; sold September 1, 2025.

Rental property acquired August 1, 2024, by an investor for the purpose of making a profit on it; destroyed in a fire on September 1, 2025.

Personal automobile acquired August 1, 2024; destroyed in a collision on September 1, 2025.

25. If the fair market value of Sec. 1245 property is greater than its basis, which of the following transactions will give rise to Sec. 1245 income?

Disposition at death.

Disposition by gift.

A Sec. 351 exchange with a newly formed corporation for all of its stock.

None of the answers are correct.

26. The Quick Torch Insurance Agency owns the land and building in which its offices are located. The agency also owns its office furniture, company cars, office equipment, and client files. Which of the following is NOT Sec. 1245 property?

The office equipment.

The office furniture.

The company cars.

The client files.

27. You purchased a heating, ventilating, and air conditioning (HVAC) unit for your rental property on December 15. It was delivered on December 28 and was installed and ready for use on January 2. When should the HVAC unit be considered placed in service?

December 15.

December 28.

December 31.

January 2.

28. A gain on the disposition of Sec. 1245 property is treated as ordinary income to the extent of

Depreciation allowed or allowable.

Excess of the accelerated depreciation allowed or allowable over the depreciation figured for the same period using the straight-line method.

Excess of the appreciated value over depreciation allowed or allowable using the straight-line method.

The difference between the amount realized over the cost of the property.

29. In July, Tommy Tromboni sold for $10,000 a printing press used in his business that originally cost him $10,000. His adjusted basis at the time of the sale was $1,000, and Tommy paid $1,000 in selling expenses. What is the amount of the gain that would be ordinary income under Sec. 1245?

$8,000

$9,000

$10,000

30. Mary Brown purchased an apartment building for $200,000. The building was depreciated using the straight-line method. On December 31 of the current year, the building was sold for $210,000 when the asset basis net of accumulated depreciation was $140,000. On her current-year tax return, Brown should report

Section 1231 gain of $70,000.

Ordinary income of $70,000.

Section 1231 gain of $60,000 and ordinary income of $10,000.

Section 1231 gain of $10,000 and ordinary income of $60,000.

31. All of the following statements with respect to the disposition of Sec. 1245 depreciable property are true EXCEPT

Gain is treated as ordinary income to the extent of excess depreciation over the depreciation that would have been available under the straight-line method.

Gain in excess of depreciation is treated as a gain from Sec. 1231 property.

In figuring the deductions affecting the recomputed basis of Sec. 1245 property, it is necessary to include any basis adjustment that was made for the investment credit.

Amounts deducted under the Sec. 179 deduction are recovered as ordinary income to the extent of any gain on a sale or disposition.

32. In January 2023, Ms. Doering purchased a $10,000 car to use 100% in her real estate business. Her MACRS deductions for the car were $2,000 in 2023 and $3,200 in 2024. She did not elect the Sec. 179 deduction. In 2025, she took a $960 (1/2-year) MACRS depreciation and sold the car in May for $7,000. What is the amount and character of her gain on the sale of her business auto?

$2,200 capital gain.

$3,160 capital gain.

$3,160 ordinary income.

$6,160 ordinary income.

33. Trudy Holiday has been selling greeting cards for several years as a sole proprietor. In May of Year 3, she purchased land and a building to use in the greeting card business. In October of Year 3, she sold the entire business, including inventory held since Year 1 and the land and building. Trudy’s automobile, used exclusively in her business and purchased in Year 1, was swallowed by a sinkhole before the sale in Year 3. Which of the following is a Sec. 1231 asset?

The inventory acquired in Year 1.

The building.

The land.

The automobile.

34. Keith, a business taxpayer, sold the following business assets during 2025:

Machinery:
Sales price	$45,000
Original cost	40,000
Accumulated depreciation	15,000
Computer equipment:
Sales price	34,000
Original cost	28,000
Accumulated depreciation	16,000

Keith had net Sec. 1231 losses in 2024 of $8,000. What is the amount and character of Keith’s gain for 2025?

$39,000 ordinary income; $3,000 Sec. 1231 gain.

$31,000 ordinary income; $11,000 Sec. 1231 gain.

$16,000 ordinary income; $26,000 Sec. 1231 gain.

$0 ordinary income; $42,000 Sec. 1231 gain.

35. John owned a printing business and sold the following assets in 2025:

Printing press:
Sales price	$25,000
Original cost	20,000
Allowed or allowable depreciation	8,000
Computer equipment:
Sales price	$30,000
Original cost	28,000
Allowed or allowable depreciation	14,000

John had a net Section 1231 loss of $6,000 in 2024. What is the amount and character of John’s gain for 2025?

$14,000 ordinary income; $15,000 capital gain.

$22,000 ordinary income; $7,000 capital gain.

$28,000 ordinary income; $1,000 capital gain.

$0 ordinary income; $29,000 capital gain.

36. The following property is all used in a trade or business and has been held in excess of 1 year. Which property will NOT qualify for gains or losses from Sec. 1231 property upon its disposition by sale or exchange?

Property held for production of rent and royalties.

Business property condemned for public use.

Depreciable property used in a trade or business.

Property includible in inventory.

37. In January Year 1, Mr. Chow purchased a $13,000 car to use 100% in his accounting business. His MACRS deductions for the car were $2,600 in Year 1 and $4,160 in Year 2. He did not take the Sec. 179 deduction or additional first-year depreciation on the car. In Year 3, he took $1,248 (1/2 year) MACRS depreciation and sold the car in May for $6,500. What is the amount and character of Mr. Chow’s gain on the sale?

$1,508 capital gain.

$1,508 ordinary income.

$4,992 ordinary income.

$8,008 capital gain.

38. During the current year, Mr. Boyette built and occupied a manufacturing plant for use in his business. All of the following assets located in the building are Sec. 1245 property EXCEPT

The large mainframe computer system used by Boyette’s research department.

The elevators and escalators.

The office furniture.

The packaging machine in the shipping department.

39. Mr. Adamson changed jobs and sold his car that he had used 60% for business. Mr. Adamson had purchased the car for $12,000 and sold it for $10,000. He had claimed $2,000 depreciation on the car. What is the taxable gain or deductible loss on the sale, assuming no replacement vehicle was acquired?

$800 gain.

$800 loss.

$2,000 gain.

40. Mr. X acquired a machine for use in his business, on January 5, Year 1, for $30,000. Depreciation was taken on the asset using the MACRS rules in the following amounts:

Year 1	$6,000
Year 2	$9,600
Year 3	$2,880

Mr. X sold the machine on January 26, Year 3, for $32,000. What is the amount and character of X’s gain on the disposition of the asset?

Sec. 1231 Gain

Sec. 1245 Gain

$20,480

Sec. 1231 Gain

$2,000

Sec. 1245 Gain

$18,480

Sec. 1231 Gain

$18,480

Sec. 1245 Gain

$2,000

Sec. 1231 Gain

$20,480

Sec. 1245 Gain

41. During the year, Michael sold the following assets he used in his business.

Machinery:
Sales price	$22,500
Original cost	20,000
Accumulated depreciation	7,500
Computer equipment:
Sales price	17,000
Original cost	14,000
Accumulated depreciation	8,000

Michael had a net Sec. 1231 loss in the previous year of $4,000. What is the amount and character of his gain for the current year?

$19,500 ordinary income; $1,500 capital gain.

$15,500 ordinary income; $1,500 capital gain.

$8,000 ordinary income; $26,000 capital gain.

$0 ordinary income; $21,000 capital gain.

42. Jordan sold a building used in his business. His books and records reflect the following information for the year:

Original cost of building	$75,000
Improvements made to building	25,000
Broker’s commissions paid on sale	5,000
Cash received on sale	50,000
Total property taxes paid by Jordan	1,500
Portion of property taxes imposed on purchaser and reimbursed to Jordan by purchaser under IRC 164(d)	500
Mortgage assumed by buyer	40,000
Accumulated depreciation	35,000
Fair market value of other property received	10,000

What is Jordan’s recognized gain on the sale of the property?

$30,000

$30,500

$35,000

$35,500

43. During the current year, Ms. C sold a building used in her business. Her records reflect the following information:

Cost of building	$ 90,000
Cost of new roof	15,000
Depreciation deducted	35,000
Cash received on sale	145,000
Taxes assumed by buyer	7,000
Mortgage assumed by buyer	25,000
Selling expenses	6,000

What is the amount of Ms. C’s realized gain on the sale?

$30,000

$66,000

$90,000

$101,000

44. Mildred and John purchased 40 acres of undeveloped land 40 years ago for $120,000. They paid personal real estate taxes of $50,000, which they elected to add to the property’s basis. They sold the property for $600,000, having total settlement costs of $70,000. The settlement costs are allowable as an expense of sale. Mildred and John received a down payment of $100,000 with the balance to be paid over 15 years. What is their gross profit percentage?

60%

72%

68.33%

82%

45. Mr. Pickle purchased property from Mr. Apple by assuming an existing mortgage of $12,000 and agreeing to pay an additional $6,000, plus interest, over the next 3 years. Mr. Apple had an adjusted basis of $8,800 in the building and paid selling expenses totaling $1,200. What were the sales price and the contract price in this transaction?

Sales Price

$6,000

Contract Price

$12,000

Sales Price

$18,000

Contract Price

$9,200

Sales Price

$18,000

Contract Price

$8,000

Sales Price

$18,000

Contract Price

$6,000

46. In Year 1, Ray sold land with a basis of $40,000 for $100,000. He received a $20,000 down payment and the buyer’s note for $80,000. In Year 2, he received the first of four annual payments of $20,000 each, plus 12% interest. What is the gain to be reported in Year 2?

None.

$8,000

$12,000

$20,000

47. Dennis and Martha sell their lake house (which they have owned for 10 years and spend each summer in) for $250,000. Their original cost was $175,000, and they had improvements of $25,000. They have never used the house as a business or rental property. They agreed to take $50,000 down and finance the balance. Monthly payments are to begin next year. How much capital gain must they report in the year of sale?

$10,000

$50,000

$15,000

48. In an installment sale, if the buyer assumes a mortgage that is greater than the installment sale basis of the property sold,

There is never a profit or a loss.

The transaction is disqualified as an installment sale.

The gross profit percentage is always 100%.

The gain is treated as short-term capital gain.

49. Each of the following situations would be considered a disposition of an installment obligation EXCEPT

An installment obligation that you give as a gift.

An installment obligation for which you accept part payment on the balance of the buyer’s installment debt to you and forgive the rest of the debt.

An installment obligation assumed by a new buyer at a rate of interest higher than the rate paid by the original buyer.

An installment obligation that has become unenforceable.

50. With respect to the disposition of an installment obligation, which of the following is false?

No gain or loss is recognized on the transfer of an installment obligation between a husband and wife if incident to a divorce.

If the obligation is sold, the gain or loss is the difference between the basis in the obligation and the amount realized.

A gift of an installment obligation is considered a disposition.

If an installment obligation is canceled, it is not treated as a disposition.

51. Harry sold 100 acres of land that he had owned for over 30 years. His original cost was $100,000. He sold the property for $500,000 and had settlement costs of $50,000. He received a $150,000 down payment with the balance to be paid over 10 years. His gross profit percentage is?

80%

70%

50%

60%

52. Arlene sold property with an adjusted basis of $35,000 to Sandy for $50,000. Sandy paid cash of $5,000 and assumed an existing mortgage of $20,000. Sandy signed an installment note for the $25,000 balance at 8% interest. Payments on the note were to be made at the rate of $5,000 a year plus interest beginning 1 year after the date of the contract. Arlene did not elect out of the installment method. What is the amount of gain that Arlene should include in the first year after the date of the contract?

$5,000

$2,500

$1,500

$4,500

53. You sold a residential lot 2 years ago and reported the $20,000 capital gain on the installment method. In the third year of payments, the buyer defaulted and you had to repossess the lot. In the first year you reported $5,000 ($10,000 × 50%) and $3,000 ($6,000 × 50%) in the second year. No payments were received in the third year, and you spent $2,500 in legal fees to repossess the property. What is the taxable gain you must report on the repossession?

$9,500

$8,000

$4,000

54. Cheryl sold a boat, which had cost her $3,600, for $6,000. The boat was not used in a trade or business or held for rent. Cheryl accepted a $1,800 down payment and an installment obligation calling for 30 monthly payments of $140, plus interest. After receiving 8 months’ payments, Cheryl sold the installment obligation for $2,500. What was Cheryl’s gain or loss on the disposition of the installment obligation?

$820

$(420)

$2,192

$652

55. In 2016, Sally sold a personal residence on the installment method. She needed cash in 2025, so she sold the note for $7,500 when the balance due her was $9,000. Her gross profit percentage was 47.5%. How much profit must Sally report on the disposition of the obligation?

$2,775

$7,500

$3,225

56. The owner of unimproved land with a basis of $40,000 sold the property for $100,000 in 2020. The seller accepted a note for the entire $100,000 sales price. In 2025, when the buyer still owed $10,000, the note was sold for $9,000 cash. How should the disposition of the note be reported on the seller’s 2025 return?

$5,000 capital gain.

$5,000 ordinary income.

$2,000 capital gain.

$1,000 capital loss.

57. During 2025, Marcus sold real property that had an adjusted basis to him of $120,000 to Andrew for $250,000. On the sale, Marcus had depreciation recapture of $20,000, which he correctly reported as ordinary income. Andrew paid $50,000 as a down payment and agreed to pay $25,000 per year plus interest for the next 8 years beginning January 9, 2026. Marcus incurred selling expenses of $15,000. For 2025, what is the amount of capital gain from this transaction to be included by Marcus in his gross income?

$11,000

$19,000

$22,000

$23,000

58. During 2023, Joshua sold land with an adjusted basis to him of $120,000 to Caleb for $200,000. In 2023, Caleb made a down payment of $80,000 and agreed to pay $30,000 per year plus interest for the next 4 years beginning January 2024. After Caleb made the payment in 2024, Joshua and Caleb agreed to reduce the overall sales price to $185,000 and the yearly payments to $25,000. What is the amount that Joshua should include in income for 2025?

$7,000

$8,400

$10,000

$12,000

59. In December of 2023, Bob sold land to Natalie for $80,000. He reported the sale using the installment method. At the time of the sale, the land had an adjusted basis of $20,000. Natalie made a down payment of $25,000 in 2023 and agreed to pay $11,000 per year plus interest for the next 5 years. The payments were to be made May 1 of each year. Before the 2025 payment was made, Bob sold the installment obligation for $30,000. What is Bob’s gain (or loss) for 2025 on the sale of the installment obligation?

$11,000

$44,000

$19,000

$33,000

60. In 2024, Ricardo sold a piece of unimproved real estate to Cliff for $20,000. Ricardo acquired the property in 1997 at a cost of $10,000. During 2024, Ricardo received $4,000 cash and Cliff’s note in the amount of $16,000 for the remainder of the selling price, payable in subsequent years. Ricardo reported the sale using the installment method. In 2025, before Cliff made any further payments, Ricardo transferred the installment obligation to his wife incident to a divorce. What is the amount of gain (or loss) Ricardo should report on his tax return for 2025?

$(1,000)

$7,000

$9,000

61. Mr. Bradshaw sold property that had an adjusted basis to him of $19,000. The buyer assumed Bradshaw’s existing mortgage of $15,000 and agreed to pay an additional $10,000 consisting of a cash down payment of $5,000 and payments of $1,000, plus interest, per year for the next 5 years. Mr. Bradshaw paid selling expenses totaling $1,000. What is Bradshaw’s gross profit percentage?

20%

40%

50%

60%

62. During Year 1, Frank sold a piece of land with an adjusted basis of $110,000 to Tony for $200,000. Tony paid $50,000 as a down payment in Year 1 and agreed to pay $30,000 per year plus interest for the next 5 years beginning in January of Year 2. Frank incurred selling expenses of $10,000. What is the amount of gain to be included in Frank’s gross income for Year 1?

$18,000

$20,000

$22,500

$50,000

63. Donald sold a piece of land with an adjusted basis of $45,000 to Mickey for $125,000. On May 11, Mickey paid $25,000 as a down payment and agreed to pay $20,000 per year plus interest for the next 5 years with the first installment payment being made on October 31. Donald incurred selling expenses of $5,000. What is the amount of gain to be included in Donald’s gross income for the year?

$9,000

$15,000

$27,000

$45,000

64. Belle Corporation, a cash-basis taxpayer, sold King Company some equipment on February 1, Year 1, which had been used in Belle’s business operations. The selling price was $50,000 to be paid in two equal installments -- the first on January 1, Year 2 and the second on December 1, Year 2. The adjusted basis of the equipment was $40,000 after considering depreciation taken to the date of sale of $5,000. Belle made no election regarding the sale on its Year 1 return. The amount and character of the gain Belle will report on its Year 1 federal income tax return is

No gain or loss.

A $10,000 gain, of which $5,000 is ordinary income and $5,000 is Sec. 1231 gain.

A $5,000 gain, of which all $5,000 is ordinary income.

A $5,000 gain, of which $2,500 is Sec. 1231 gain and $2,500 is ordinary income.

65. In October of Year 1, Rocky sold land for $100,000 on the installment method to Natasha. At the time of the sale, the land had an adjusted basis of $40,000. In Year 1, Natasha made a down payment of $20,000 and agreed to pay $16,000 per year plus interest for the next 5 years. The payments were to be made May 1 of each year. In March of Year 3, before the Year 3 payment was made, Rocky sold the installment obligation for $35,000. What is the amount of Rocky’s gain or (loss) for Year 3 on the sale of the installment obligation?

$64,000

$25,600

$9,400

$38,400

66. Margaret, a widow, sold 100 acres of land she and her husband paid $20,000 for 15 years ago. He died in the current year. As of the date of his death, the land was valued at $100,000 for estate tax purposes. Margaret sold the land for $200,000 on an installment basis. What is her gross profit percentage?

90%

70%

50%

60%

67. During 2025, Judy sold a pleasure boat that had an adjusted basis to her of $60,000 to Terry for $100,000. Terry paid $20,000 as a down payment and agreed to pay $20,000 per year plus interest for the next 4 years. What is the amount of gain to be included in Judy’s gross income for 2025?

$8,000

$16,000

$20,000

$24,000

68. Jim and Jean purchased a vacation home in 2018 for $100,000. They sold the property for $500,000 in 2025 and received a down payment of $200,000. They took a mortgage from the purchaser for the remaining $300,000. What is Jim and Jean’s gross profit percentage on this sale?

40%.

60%.

80%.

None of the answers are correct.

69. Ethel and George sold an investment property they purchased 10 years ago for $300,000. The property was sold for $700,000 with a down payment of $140,000. What is the gross profit percentage?

57.14%.

22.86%.

28.57%.

None of the answers are correct.

70. Bob and Naomi (husband and wife) sold their boat for $75,000, with a gross profit of $25,000. What is Bob and Naomi’s gross profit percentage for this sale?

25%

33 1/3%

30%

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