Posted by Dave T on May 21, 1999 at 17:43:36:
You are perhaps alluding to a tax-deferred exchange, sometimes called a 1031 exchange. Section 1031 of the IRS code provides specific rules for replacing an investment property with a like-kind investment property and deferring the capital gains.
Once you have replaced your investment property with another investment property, the IRS does allow you to convert your investment rental property to your primary residence. Of course, you must operate the replacement property as a rental for some reasonable period of time before conversion to primary residence. There is no specific definition of a “reasonable period” but current thinking suggests 24 months. If you convert too soon, the IRS can invalidate your conversion and force you to recognize the capital gain on the sale of your investment property.
After you convert your rental to a primary residence, then all future capital gains qualify for exclusion under the 2 year ownership and use rules.