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Installment sales: 2 years are better than 1

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in Leaders & Managers,Management Training,Small Business Tax

Q. In a recent article ("Exclude tax on home installment sale"), you said that installment sales must take place over two years. But isn’t the rule only that the payment must be received in the following year? J.H., Pensacola, Fla.

A. Technically, you’re correct. However, if you simply defer all payments to the year after the year of the sale, you do not receive any tax benefit other than deferral. Another tax objective of an installment sale may be to spread out the taxable gain over two or more years. Typically, you would arrange for an installment payment in the year of the sale and at least one more in the following year.

Tip: For this reason, installment sales are a valuable year-end planning technique. For instance, payments may be received in December 2010 and January 2011.

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