Four years ago, Mr. B sold his personal property on contract for $200,000, which resulted in a capital gain of $100,000. Mr. B properly elected to use the installment method of reporting and through last year had collected $40,000 on the contract. At the start of this year, the buyer defaulted on the contract, and Mr. B repossessed the property. At the time of repossession, the property had a fair market value of $160,000. What is the gain or loss to be reported on the repossession?

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Complete Question

Four years ago, Mr. B sold his personal property on contract for $200,000, which resulted in a capital gain of $100,000. Mr. B properly elected to use the installment method of reporting and through last year had collected $40,000 on the contract. At the start of this year, the buyer defaulted on the contract, and Mr. B repossessed the property. At the time of repossession, the property had a fair market value of $160,000. What is the gain or loss to be reported on the repossession?

A) $20,000 Capital gain

B) $45,000 Ordinary income

C) $60,000 Ordinary income

D) $80,000 Capital gain

E) $100,000 Capital gain

D) $80,000 Capital gain

Explanation:

From the question, we are told that Mr B sold his property for $200,000 on contract with $100,000 Capital gain. A Capital gain can be defined as the higher profit that is obtained from selling a property due to the fact that the price at which the house is been sold is higher than the price at which the property was bought.

This means the purchase price of Mr B's property = $100,000

Last year, Mr B collected $40,000 on the contract

Mr B repossessed his property which had a fair market value of $160,000 due to the default in payment of the buyer.

This means : Mr B collected a capital gain on repossession and this is calculated by:

(Selling price + Amount collected on contract) - Fair market value

($200,000 + $40,000 ) - $160,000

$240,000 - $160,000

= $80,000

Therefore , the gain to be reported on the repossession is $80,000 capital gain.

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