Tax-deferred real estate exchanges are supposed to involve investment properties but you can put your residence into the deal. Say you sell a rental property you own in Virginia. You have a third-party hold the sales proceeds, which are used to buy a house in California, where you want to retire.
You rent out the California house, making it investment property. If done correctly, this transaction defers any tax you owe on your Virginia rental property.
Be sure to rent the California house at a fair rate, using a formal lease. This will show that the house really was used as investment property. After a year or so, you can stop renting the California house to tenants and move in, using it as your retirement home.
If you want, you may eventually sell the California home. Be sure to wait until:
* You have lived in the California home for at least two years; and
* It has been at least five years since you acquired the California home and used it as rental property.
By following these guidelines, you’ll qualify for a $250,000 capital gain exclusion ($500,000 if you’re married) on the sale of what has become your principal residence, in California.