Avoiding Capital Gains on Rentals

[Jillian S.]

I'm reading conflicting things regarding capital gains on rentals.  According to the IRS site, it looks like one can live in a rental property for 2 of the past 5 years, even if that property was acquired as a 1031 exchange.  One must keep the property for a minimum of 5 years.  My understanding is that if I do this, for each of my two rental properties, then I can avoid capital up to $250K (I'm single). Only selling one property every two years of course.  

Now...I recently read an article stating that, for example, I have the property for 5 years, I live in it for 2 of the 5 years before selling, and it's a rental for the other 3 years.  I would only be able to avoid 2/5 of the capital gains, due to the fact that I lived there only 2 years (qualified used), but the other 3/5 of the gains would be taxable because I didn't live there, it was a rental for 3 years (unqualified use).  I'm not seeing anything about this on the IRS website, however.  

Can a tax attorney or a CPA advise?  I'm considering doing a 1031 exchange on two rentals, purchasing in a different city, and over the next 5-10 years, I would live in both of them for 2 of the 5 years before selling them.  (maybe...who knows how life changes!  haha, but that may be the plan for now). I'd really like to have some solid knowledge on this before doing a 1031 exchange as depending on what the deal is, I may just keep the current rentals.  

Thanks in advance!

  

[Bill B.]

If it’s a rental first, the percent of time owned that ou lived there is tax free, the 2 of 5 rule doesn’t apply as our predecessors “used the heck” out of that tax advantage when they wanted to sell. 

If it’s a primary first you can sell and take advantage of the capital gains tax free sale if you live there 2 of 5. (Still have to pay depreciation recapture.)but with selling and acquisition costs you have to be shielding a big gain to make it worth selling and starting over. Almost half my rentals were primary’s first and I still own them 10 years later. I used them for the lower downpayments and better rates, not so I could sell within 3 years.