If you own investment property, chances are that a sale would trigger a large capital gain. Instead, exchange this property for a house that you rent out.
That is, sell your investment property and appoint an unrelated intermediary to hold the sale proceeds. From that point, you have: 45 days to identify (in writing) replacement property you desire, and 180 days to close the deal. The intermediary can use the sale proceeds to buy a rental house. As long as you don’t put cash into your pocket or enjoy any debt reduction from the combined transaction, no tax will be due. Subsequently, you can move into the rental house. It’s probably a good idea to rent it out at least until you file a tax return, treating the house as rental property.
After the conversion, if you make the house your principal residence for two years, you can sell it and use the $250,000 exclusion for gain on a home sale. (If you’re married, filing jointly, you can exclude gains up to $500,000.) Thus, you may avoid all the taxable gain that would have been due on the sale of your old property.
