Investors & landlords

You need to discuss your scenario with a Qualified Intermediary (aka1031 exchange accommodator). You can find one in your area through a simple internet search.

 

Beyond that, there is really no way to avoid depreciation recapture and capital gain (for the period the property was used for rental purposes) when you eventually sell the replacement property. 

 

If you convert the property to use as your primary residence, then you may qualify for the two out of five year home sale exclusion (but you will still have disqualified use and there is a mandatory five-year holding period before the exclusion kicks in).

 

See https://www.irs.gov/taxtopics/tc701

 

There is no specific time frame before conversion from investment to personal use, but extreme caution should be exercised in this regard. Many facilitators recommend one year, but shorter periods have been allowed.

 

In this regard, see https://www.irs.gov/pub/irs-drop/rp-08-16.pdf for reference.