I know you didn't ask this, but it really should be addressed:
Can you immediately sell the new property?
No. A 1031 Like Kind Exchange only applies to investment property. "An exchange of real property held primarily for sale does not qualify." I can guess what you're thinking: "I bought it low and sold it high, that's an investment, right?" Nope.
If you buy a candy bar for $1, put it on a shelf, and then sell it for $2, then the candy bar was inventory (not an investment). And you ask "Then what is an investment?" The shelf was an investment. Your business made money by having it, not by selling it.
For a property to be an investment, your business needs to make money by having it (not just by selling it, which would make it inventory). That generally means renting the property out. "How long does it need to rent?" Uh... make that a separate question.
Can you sell the new investment property without a capital gain?
No. In a 1031 Like Kind Exchange, the cost basis transfers to the new property. In your example, the investment property still gained $700,000 (sale price $750,000 minus cost basis $50,000) and you would have a capital gain of that amount.
Note that the cost basis does change for other reasons ignored here, for example, depreciation.
Can you avoid the tax on a capital gain?
Yes! If you live there for 2 years (and other rules here) then the sale of your home at a gain would not incur capital gains tax (up to the amounts you noted).
So... What's the plan?
- Buy it low value
- Rent it out for a year
- Increase it's value
- Like kind exchange it for something with higher value
- Rent it out for a year
- (optionally, goto step 3)
- Live in it for two years
- Sell it
- Profit