Strategy for High Equity Rental Properties

This is probably a tax law that many of you know already, but I feel compelled to state it just in case there are a few who are unaware of its benefits.

We all know about the tax law that states if you live in your primary residence for two year out of the last five years, you can keep up to $250,000 from the profits from the sale as an individual or $500,000 for a married couple. The two years does not have to be consecutive. It could be one year in the beginning of the five years and one year at the end of the five years, does not matter.



Well, if you have a investment home (single-family) that you have held for a while and has greatly appreciated, you can apply the same rule to the investment home. Normally, you would have to either pay tax on capital gains or roll the gain into another property through a 1031 exchange. This option would be to move into the investment property for two years and then take the gain out tax-free up to the applicable limits. Note, that you will still have to pay taxes on the recaptured depreciation that you benefited from during the investment period.

This strategy works most effectively with single-family homes, because with a mulit-unit, only the part that is your principal residence will qualify.

As always, consult your tax professional to see if this strategy will fit your needs.