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 Dear
Tax Talk,
I understand the concept of capital gains and I also understand
how the two-years-in-a-primary-home thing works. My question is, how can I know
how much capital gains I will be paying?
My property has been rented for three years now.
I have never lived in it. Are there still ways to avoid, not evade, but avoid
taxes?
-- Enrique  Dear
Enrique,
When it comes to taxation there is always room to avoid
taxes, at least in the short term.
With the rental property,
you can avoid taxes in either of two ways: 1) Make it your "primary-home"
or 2) do a like-kind exchange. If you live in the home for
two years as your primary home, you can qualify for the $250,000 gain exclusion.
Under this alternative, you're actually avoiding taxes forever on up to $250,000
in appreciation in the property since you've owned it. When you sell, you will
have to pay tax on the depreciation that was allowed or allowable during the rental
period. Depreciation is recaptured at a maximum tax rate of up to 25 percent. With
a like-kind exchange, you do not move into the home. Instead, you exchange it
for another property, usually of greater value using the equity that has been
built up in the property. You don't actually have to find
someone with a property that wants yours in exchange. Rather, you enter into a
three-way exchange with an intermediary, usually a title company. Under this scenario
you find a buyer for your current property and close, leaving the proceeds in
escrow with the title company. Within 45 days of selling the
rental property you have to identify by contract a replacement property. The title
company uses the escrowed proceeds to acquire this replacement property within
180 days of the first sale and titles it in your name. Use a reputable title company,
as there have been recent reports of fraudulent activity in the industry. Under
this alternative, you defer the gain from the first property into the replacement
property. If you later sell the replacement home, you pay tax on the deferred
gain. If you choose to sell the property outright, you will
pay up to 15 percent tax on the capital gain (the appreciation in the property),
plus the 25 percent tax on the depreciation recapture. Under this scenario, there
is no way to avoid taxes. If you're looking to sell in order
to reinvest in another property, your best alternative is the like-kind exchange. | 
