Stated Maximum Selling Price

A contingency sale will be treated under the "stated maximum selling price" method if under the terms of the agreement, the maximum amount of sales proceeds that may be received by the taxpayer can be determined as of the end of the tax year in which the sale or other disposition occurs. This maximum selling price is then used as the sales price in the gross profit percentage formula as defined in Treasury Reg. Sec. 15A.453-1(b)(2). The amount of any payment received or to be received is then treated as income in proportion to the gross profit percentage. The following example best illustrates this.

Example: In 1994, Mr. Jones sells rental real estate to Mr. Smith for $100,000 plus five percent of the profits for 10 years, with a maximum amount of payable of $3,000,000. For simplicity, assume no mortgage and that Mr. Jones’ adjusted basis is $300,000. The calculation is shown in the accompanying figure.