Tax Guru – Ker$tetter Letter

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Tax free sales of rental homes

Posted by taxguru on January 6, 2007



Subject: Tax Question
Hi Kerry – 
I was wondering if you could help me with a residence tax question.  I currently live in a Primary Residence in MI, and have a condo in AZ that I am renting out.  If I sell the house in MI and move into the condo after the current renters lease is up, and live in the condo for 2 years, can I avoid capital gains?  It is currently a rental property for me.  If not, do you have any idea how I could avoid capital gains on the condo?


Ever since the current law regarding residence sales was enacted in May 1997, this has been a very common strategy; to convert rental homes into primary residences and sell them tax free after two years, again and again.  I used to call it the “conversion game.”  Others have called it “serial home selling.”

This strategy is still available today, except in the case of rental homes that had been acquired as replacement property for a 1031 exchange.  As I explained in my blog, you need to have owned the home for at least five years in order to use the Section 121 tax fee exclusion, in addition to meeting the two year residency test.

Most of these issues are explained on my website.

As always, before implementing any tax saving strategy such as you are proposing, you must consult with an experienced tax professional to ensure that you do everything properly and don’t shoot yourself in the foot. 

Good luck.

Kerry Kerstetter




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