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What is the best way to avoid capital gains tax on the 65K?

Hop into your handy dandy time machine. Set the date for December 2007. When you arrive, smack yourself upside the head and tell your historical self that you need to do tax planning BEFORE the sale closes. Because if you wait until after the sale it's too late and you can't do anything to avoid or reduce the taxes. Suggest to your 2007 self that you consider a 1031 exchange, and remind your 2007 self that an exchange needs to be put in place before the sale closes.

And while you're doing that time travel, go back and grab copies of any receipts and cancelled checks for improvements you made to the property. Those add to your cost basis and will reduce your gain.

Now, welcome back to the present. I see your time travels were not as successful as we had hoped. So the best you can do at this point is to document all of the improvements to the property that you can.

--Peter
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