Homeowners seek to avoid taxes on sale of rental

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DEAR BOB: About 10 years ago, my wife and I bought a beach house thinking we would use it for vacations and weekends. But our children had other plans for us, as they didn't like the cottage because it is rather "cozy" (i.e. small). So we rarely used it. For the last eight years, we rented it to a widow who recently died. When we looked into selling it, several local Realtors informed us it is now worth about $600,000 more than we paid. Our CPA says this will be a taxable capital gain if we sell. She says the only way to avoid tax on selling this rental beach house is to make a tax-deferred exchange for another investment property. But we don't want another property. As we are retired, can we move into this beach house for a few years and then claim that $500,000 home-sale tax exemption you often discuss? – Edward G. DEAR EDWARD: Yes, you can convert that rental beach house into your principal residence. However, the beach house will have to be your principal residence for an "...