Your Client, a real estate agent named John Snow, has asked you to assess the tax implications
Question:
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.
Auditing An International Approach
ISBN: 978-0071051415
6th edition
Authors: Wally J. Smieliauskas, Kathryn Bewley