Posted by Dave T on July 19, 2004 at 21:11:35:
For little or no capital gains tax:
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Move back into the property and reestablish it as your primary residence for two years. Once you satisfy the two year rules, up to $250K of profit per taxpayer is exempt from capital gains taxes. Gain over the exempt amount is subject to long term capital gains taxes.
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Use a 1031 like-kind exchange to realize the profit and reinvest it into another (more expensive) investment property. A 1031 exchange, when properly accomplished, defers all capital gains taxes until you sell the replacement property in a taxable transaction.
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Do not sell. Instead, if you want to cash out some of your equity, just do a cash out refinance. A cash out refinance is tax free. Additionally, some or all of your mortgage interest is a Schedule E deduciton.
To minimize your income tax bite in a single year, sell the property on an installment sale. Depreciation will be fully recaptured in the year of sale, but the portion of your profit due to appreciation will be taxed as you receive it in the year received.
A little more agressive approach would be to create an inheritance to take advantage of the stepped up basis. If you are a single woman, perhaps you could find a death row inmate about to be executed. Marry the felon, and have him execute a will which leaves you all of his possessions. Then execute a quit claim deed to transfer title to your new spouse as a sole owner. After his execution, you inherit his property at its stepped up basis. Sell the property at FMV for no net capital gain and no capital gains taxes. If you want to keep using the property as an investment rental, your stepped up basis is used to determine your new depreciation schedule over the next 27.5 years.