Sell rental to buy primary residence- tax question

[Maria D.]

We are considering moving to a new area and would like to keep the home we currently live in as a rental. We would like to sell two smaller rentals we have to buy a new primary residence. We are looking for a primary resident with either an attached or detached in-law unit.

I’m concerned about capital gains and property taxes. The homes are all in CA and one has a good tax base because of prop 13 and how long we’ve had it. Are there any tax savings strategies we should explore to maximize tax savings?

[Dave Foster]

@Maria D., It could be possible as @Brian G. said to sell those two smaller rentals and exchange into a multi family that you use partly for primary residence and partly as a rental.  There's nothing inherently wrong with renting to your mom but the IRS will want it to be a transparent arms length arrangement.  Detached or not does not matter as long as your accountant can make a delineation for the % of respective use. 

The key to this would that the investment portion os the new property be enough to absorb both of the sales.  You must take title to as much investment property as you sold.  If the two rentals were sold for $400K and you wanted to purchase two unit property that was equal in size and worth $800K then that would work.  But if the replacement property were only $600K and the rental portion was $200K it would not.  You would be purchasing $200K less than what you sold and there would be a taxable event.  So your plan is possible but you've got to watch the numbers.

What I'm most curious about is your decision to convert your current primary into a rental and sell the other two properties to invest.  If you've lived in that property for at least 2 years then you could take the first $500K of profit tax free.  This could be used to purchase the new property you're considering without having to think about 1031 or ratios or tax consequences.  Primary residences rarely . make the best rentals.  and tax free is always better than tax deferred.  

There could always be a lot of factors that you haven't mentioned that make this a non-starter.  But that's what jumped out at me first.