I purchased my original home many years ago when I was single. It is a very small condo unit and was much cheaper than I could get a "regular" house for at the time. Later I got married and purchased a larger home, but let a family member (parent) stay in the old one. They have been living there more than five years, but now they are moving out and I want to sell it. My family has gotten larger and is running out of space and also needs a larger home than the one we have now, and with the sale of both houses we could potentially afford a larger house. However, it seems tax laws have changed since I first moved and now there are capital gains tax on sales of a second home which may jeopardize that as home prices have gone up a lot and so all the gains from both properties would likely be eaten up by a higher price tag on a new home.

Are there any loopholes under which I would not have to pay this tax? Something like if I roll the proceeds of both sales into a new primary residence? Or maybe due to a family member having lived there?

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    Has the smaller home been treated as an investment property? Have you been charging rent, and have you been taking depreciation? Commented Jan 8, 2021 at 11:13
  • @mhoran_psprep no
    – Andy
    Commented Jan 8, 2021 at 16:31

3 Answers 3


Are there any loopholes under which I would not have to pay this tax? Something like if I roll the proceeds of both sales into a new primary residence?

That method of deferring profit on the sale of a principal residence, ended in the 1990's. Keep in mind there were also requirements for a minimum number of years it was your principal residence, and eventually there was a exclusion of $125,000 in profit if you were over 55. But all that ended with the tax law changes in 1997.

Unfortunately all methods of minimizing the capital gains tax involve converting the smaller property to your principal residence.

Making it your principal residence would take at least two years, and would involve some sacrifice because of the small size. You would have to change all your documentation to show the smaller home as your principal home. This would be similar to how some people convince their old state they have moved to a new state. Depending on the distance between the two, and the jurisdictions involved; this shift to the smaller home could also impact commuting times, school attendance, and income taxes.

Making the smaller home an investment property would take time, and ultimately not be helpful. The shift to making it an investment property, and then selling it some years later would still leave you with taxes on the gain while it is a rental property. The US and state government will also want to capture the gains while it wasn't being rented. The 1031 exchange as others have suggested, not only defer the gains it also keeps the proceeds out of your hands. If the goal is to have the proceeds to be able to buy an even bigger house then the convert-to-rental=followed-by-a-1031-exchange won't work for you. Plus being a landlord involves work, money, and more tax forms.


If you can afford it you can use a 1031 exchange of your second home into a new investment property you like. Then you could sell your primary residence (with exemption) and convert your investment property into a primary residence. Then you could refinance as a primary residence. Then, when you sell eventually you may have a tax exemption on it.

Executing this strategy takes extra time but can be worth it depending on your expected tax burden.

  • Oh that's clever... there would be a bit of extra costs (due to the higher rates etc. of the initial mortgage on an investment property followed by refi costs) but it could be worth it.
    – Andy
    Commented Jan 8, 2021 at 6:42
  • but is it possible to use a 1031 exchange on a second home that wasn't an investment property to begin with?
    – Andy
    Commented Jan 8, 2021 at 6:44
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    hmm... might not work if the new property is more than 200% (2x) the value of the first property.
    – Andy
    Commented Jan 8, 2021 at 6:48
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    My understanding (I am not a 1031 expert) is that you'd need to hold the new investment property for a reasonable period of time (probably a couple of years) before trying to convert it to a primary residence. And that would require that you could qualify for and carry a mortgage on the larger house plus the current primary residence for that time. Commented Jan 8, 2021 at 6:52
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    yay, tax loopholes Commented Jan 8, 2021 at 17:20

As a married couple, the first $500,000 in capital gains on your primary home are free from capital gains taxes. But you'd have to pay capital gains on whatever profit you make from the sale of the second home.

You could sell your primary home, pocket the gains, move back in to the second home for two years (could be spread over a five year period), and then get a second $500,000 capital gains exclusion. But I assume that is highly unappealing given that the larger home is getting to be too small for your family. And I would assume that it would be impractical/ unappealing for you to establish the second home as your primary residence separate from your family for two years before selling it.

You could defer gains on the second home via a 1031 exchange but that would require that you roll the money into a new investment property not into a primary residence.

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    The 1031 exchange would also require that they had been treating the smaller home as a rental rental property, which would have required them to file the tax forms related to the rental period. Commented Jan 8, 2021 at 11:08

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