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Year-end personal tax strategy: Postpone tax on real estate gains

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in Small Business Tax

If you sell investment real estate at a gain before year-end, you’ll have to pay the full amount of the tax on the 2008 return due in just a few short months. But you can stretch out payment with some tax-smart planning.

Strategy: Arrange an installment sale of the property. As long as you receive payments over two or more years, you’re taxed only on the portion of each payment attributable to the gain, plus the interest.

Example: If you sell real estate and receive one payment in December and another in January, the profit is taxable over two years. Not only do you postpone a portion of the tax, the overall tax is reduced if you would have been taxed at a higher rate, if the entire gain had to be reported this year.

Tip: This tax break is automatic for real estate investors. But you can “elect out of” installment sale treatment if your income was low this year or it otherwise suits your needs.

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