It is possible to convert your investment property to personal use without paying capital gains tax, but remember, it takes planning and adherence to the rules. Our client, in this case, after many years of ownership, sold a two family rental property and acquired a replacement property in Florida. The new property was a single-family, that they immediately rented to a third-party. They rented it for two years and notified the tenant that they would not renew the lease. As soon as the property was ready, they moved into it and made it their primary residence. No tax triggering event occurred.
If the client later decides to sell the property and they have resided in it for at least two years and have owned it for five years, they will qualify for Section 121, personal residence exclusion. That exclusion is $250,000 for an individual or $500,000 for a married couple filing jointly. Revenue Procedure 2005-14 aligns Section 1031 and Section 121 for this treatment. Some recapture of depreciation may apply for deductions taken during the rental usage.