Chapter 18, Problem 54P

On June 30, 2019, Kelly sold property for $240,000 cash and a $960,000 note due on September 30, 2020. The note will also pay 6% interest, which is slightly higher than the Federal rate. Kelly’s cost of the property was $400,000. She is concerned that Congress may increase the tax rate that will apply when the note is collected. Kelly’s after-tax rate of return on investments is 6%.

1. a. What can Kelly do to avoid the expected higher tax rate?
2. b. Assuming that Kelly’s marginal combined Federal and state tax rate is 25% in 2019, how much would the tax rates need to increase to make the option identified in part (a) advisable?