Do you own investment property that has appreciated sharply in recent years? Chances are, if you sold this property you’d owe sizable capital gains. That’s especially true after you have taken substantial depreciation deductions.
Instead of selling, you can enter into a tax-deferred, like-kind exchange for another rental property near your home. Such an exchange can be tax-free under Section 1031 of the tax code. Ideally, your new investment property will be an attractive home that you rent out.
Eventually, you and your family can move into that home, making it your primary residence. After two years, you can sell that home. If it has been your principal residence and if you’re married you can qualify for a $500,000 tax exclusion on such a sale. (If you’re married, the exclusion is $250,000.) Such a maneuver can save you up to $100,000 in federal income tax at the 20 percent capital gains rate.
Publisher’s Note:
For more information on this tax exclusion and many more ways to maximize your home’s equity, go to https://www.fedweek.com/Publications/default.asp where you will find an excellent resource, Your Home, Your Money: The Complete Homeowner’s Real Estate Guide. This is a one-of-a-kind guide that all federal employees and military members with homes should have. Your home is one of your biggest and most rewarding investment to you and you should take full advantage of all of the tax breaks and leverage you accumulate with it.
