If you’re so inclined, you could buy a series of “fixer-upper” homes, adding value through home improvements while you lived in those homes. Every two years you could take untaxed profits, even if you sold 20 homes in 40 years. That untaxed profit could be as much as $250,000 per house, or $500,000 if you’re married.
There is a catch, though. If you have taken deductions for a home office, you won’t be entitled to a full $250,000 or $500,000 exclusion. That exclusion is only for a principal residence and the portion of your home used for an office is not a residence. Thus, if you’ve been taking home office deductions you should stop claiming them before you sell the house, turning that portion of your home back into a residence.
Another strategy is open to anyone with a rental property. Rather than sell this property, and pay tax, you could enter into a tax-free exchange for a rental home. (Section 1031 of the tax code requires that exchanges be for investment property.) After a year or so, you could move into the rental home, making it your primary residence. Two years later you can sell that home and use the $250,000 or $500,000 tax exclusion.
