I own a condo/townhouse in a San Diego beach town that has appreciated significantly since I bought it in early 2013. I would like to cash out the significant amount of equity in it to remodel my primary residence. I am having trouble finding a way to do so without taking a significant tax hit (depreciation recapture + capital gains). I have already refinanced to the max conforming limit ($510k), which allowed me to take out some cash and maintain a reasonable interest rate, but that still leaves me at about 40% LTV. Even if I took out another loan on it, the additional monthly payment would make me cashflow negative. A few questions for the tax experts out there:

1. This was previously my primary residence. Can I sell outright without paying taxes? We did not live in it for the required two years. I am active duty military, and we moved out and began renting it after six months due to deployments, then living in military housing, then permanent change of station to the East Coast, which should qualify us for the exemption. I've talked to a few accountants on this and received three different opinions. The first (my realtor's CPA) said no taxes owed whatsoever; the second said I'd have to pay cap. gains and depreciation recapture in full; the third said I'd have to pay depreciation recapture, and 25% of the capital gains would qualify for the tax exemption (6 months out of the required two years) but the remaining 75% of capital gains would be taxed. Any real estate tax attorneys out there that can help me out with this?

2. I've done some research online, and found an obscure variant of the 1031 exchange called a "leasehold improvement exchange." Anyone have experience executing this type of transaction? It looks very complex. Is this feasible with the replacement/improvement property as a primary residence?

3. Any other refi / 2nd mortgage / HELOC options that could provide tax-free access to this equity and minimize/eliminate the monthly payment?

This situation is frustrating - we bought this property as our home and held onto it (making very little cashflow and return on equity) so that we wouldn't lose out on housing market gains as we moved around and rented while I served on active duty. Now that we're ready to move on from the military, we want to sell and put that equity into our new, forever home, but we stand to lose over 40% of the equity we've earned to taxes. I'd appreciate any help or referrals (CPAs or RE Tax Attorneys in California) the BP community can provide me!

San Diego, California

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