Asked by fcs  |  Submitted August 11, 2015

I have a property that I have rented for five years and am trying to avoid capital gains taxes.

If I move in and live there for two years it becomes owner occupied and I have a $250,000 exemption. If I sell it now and do a starker I have to roll over all the money. Can I do both, i.e. make it owner occupied and then the amount over $250,000 invest that in another rental property?

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  Answers  |  1

August 12, 2015

Hi FCS, the official rule is that you have to live in a property for 2 of the last 5 years before a sale. So yes if you move into the property you can avoid capital gains on the sale of to $250k. If you do this there is no need to do a 1031 exchange (rollover). A 1031 will defer any gains if you buy another property within a short period of time. In my experience these kind of exchanges are complicated and due to time constraints causes people to invest in properties that provide low rates of return. While avoiding taxes is a good thing don't let it drive your investment decisions. Ultimately the investment has to stand on its own in terms of profitability regardless of the tax savings. Keep in mind you can only take the $250k exclusion every two years. So if you do purchase another rental you need to live in and own it for at least two years to avoid the capital gains again.

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