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Installment sales: year-end tax strategy

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in Small Business Tax

Typically, the income you receive from the sale of real estate or other property is taxable in the year it is received. However, there’s a way you can spread out the tax bite on a profitable sale.

Strategy: Sell property on the installment basis. As long as you receive payments in more than one year, you pay tax only on the portion of each payment attributable to your gain plus interest. For example, if you sell real estate and receive one payment in December and another in January, the profit will be taxed over two years instead of one.

Not only do you defer tax with an installment sale, you also reduce your overall tax if you would have been taxed at a higher rate had the entire gain been reported in one year. However, if it suits your purposes, you can “elect out” of installment sale treatment on your tax return. You might do this if 2009 has been a low-income year and you expect 2010 to be a high-income year.

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