A savvy real estate owner can postpone tax by selling property on the installment sale basis. But you may be able to postpone the tax bill even further.

Strategy: Consider using a “wraparound sale.” In effect, you offer to carry the buyer’s note to facilitate the sale of the property.

This can be an especially handy technique in a slumping real estate market. The wraparound sale may be used for personal or business property.

Basic premise: Generally, a real estate seller pays capital gains tax on the profit portion of installment payments received each year. But the tax payments may be postponed with a wraparound sale because the seller continues to make payments on the old mortgage.

Example: Cement a real estate deal.

Suppose you sell your vacation home for $400,000 at a $200,000 gain. You have an outstanding mortgage balance of $100,000. The buyer assumes the $100,000 mortgage as part of the deal.

For tax purposes, the contract price is $300,000 ($400,000 sales price – $100,000 debt). So the gross profit margin applied to the installment payments is 66% ($200,000 gain plus $300,000 contract price). If the first installment payment received is $80,000, you’re taxed on $52,800 ($80,000 x 66%).

Alternatively, you may arrange a wraparound sale. The buyer doesn’t assume the mortgage. Instead, you hang onto it and take back another mortgage from the buyer. So, you take back the buyer’s note while continuing to make mortgage payments on the original $100,000 loan. This reduces the profit (and tax) on the installment payments received.

New result: The buyer doesn’t assume the $100,000 debt, so the contract price is the same as the sales price—$400,000. Rather than being 66%, the gross profit margin is only 50% ($200,000 gain plus $400,000 contract price). If you receive the same initial $80,000 installment payment, you’re taxed on $40,000 ($80,000 x 50%) instead of $52,800.

Of course, there may be a difference between the interest rate a seller must pay on an old mortgage and the rate charged to the buyer on the new note. You won’t want to lose money on the deal. However, in this current low interest rate environment, it should not be much of a problem. If a slight shortfall exists, it can be offset by the income tax reduction.

Tip: This technique doesn’t lower the total taxable gain, it just defers the recognition gain and the related taxes. But it could push through a sale in a tight market.