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Example: Combine both breaks for a tax bonanza

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Say that you bought 100 shares of Jones Co., a qualified small business, for $10,000 on June 1, 2001. On May 1, 2006, you sell the shares for $100,000. Then you reinvest the full $100,000 in shares of Smith Co., another qualified small business, on May 2. Thus, you pay no current tax on the rollover and your adjusted basis in the Jones Co. stock is $10,000 ($100,000 spent to acquire the Smith Co. stock minus the $90,000 gain rollover).

For tax purposes, your ownership of the Smith Co. stock is considered to have started on June 1, 2001, since the time spent owning the Jones Co. stock is tacked on. So, you can sell the Smith Co. stock anytime after June 1, 2006, and pay tax of only 14 percent on your gain.

For instance, if you sell all the shares on Oct. 1, 2006, for $110,000, you’ll generally pay federal capital gains tax of just $14,000 on the $100,000 profit.

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