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I live in CT. Anything will cash flow as long as the income exceeds the expenses, right? That said, my primary concern here is not generating cash flow. There are better ways to accomplish that.

Understood. We're saying the same thing. What I'm getting at is I would like to keep the property but, on the chance that I might want to sell it after it's been a rental for more than 3 years, I'd like to make sure that I've protected the substantial capital gain that I would have if I sold today. Take the gain and exemption now and reset the clock. Then if I sell at any point, the cap gain (or loss considering where the market is going recently) is measured from when I convert it into a rental.

Nope, I need to borrow if I'm going to have both prop A and B. It's just a question of where I hold the mortgage. On prop A the interest would offset the rental income on sched E. On prop B the interest would offset income from my day job (sched A). The end result should be the same in either case EXCEPT, my income is at the point where itemized deductions are being phased out. So, I'm told that putting it on sched E is the way to go (won't lose it there).

My primary concern here is not investment, it's keeping property A and making use of it at some point in the future as a summer home and possibly a primary residence again when we can fit back into it. It's a high-end water-oriented property that will likely hold it's value better than most properties in a down market and appreciate more than most in an up market.

Thanks for your reply Joe. This is the kind of thing I'm hoping to be able to do. I've consulted two tax professionals to this point and one says that this is possible and the other says it's not since the IRS would say that the transaction was not at "arms length". I think it's time to consult a CPA on this.

Hello Everyone,

I have kind of a sticky situation. My wife and I have jointly owned our primary residence (let's call this property A) since 1996 and have built quite a bit of equity in it. We recently decided to purchase a bigger place (let's call this property B) and rent property A. I have three tax related objectives in this transaction:

1) Protect my capital gains tax exemption (part 121 I think it's called) that I have built to this point on property A should I decide to sell it at some point after it has been a rental (not our primary residence) for 3 years.

2) Get my basis on property A as high as possible to maximize the tax benefit from depreciation. This would also help with objective 1 in that it would "reset" the capital gains basis.

3) Refinance property A and use the proceeds to purchase our new primary residence (property B) and have the interest on this new mortgage be expensible, that is, be able to treat it as an expense to offset the rental income.

I've talked to several people and all tell me I'm essentially screwed on this. They say that my basis must be calculated from the original purchase price plus capital improvements and that if I use the proceeds of the refinance for purposes other than directly related to the rental (property A) then I won't be able to expense the interest OR deduct the interest.

What really gets me is that if I were to SELL property A and use the proceeds to purchase property B, and then go out and purchase an investment property of the same value as property A (I could even repurchase property A for that matter) and take a mortgage on it, I would essentially achieve all three objectives. The problem with this is that first, I would rather not sell in this market and second, I like property A and plan to turn it into a part time vacation home at some point in the future and maybe even turn it back into our primary residence once the kids are grown and out of the house.

Can anyone think of a way to achieve these objectives without selling property A? Is there some sort of way to do an "arms length" transaction in order to achieve this? I'm not trying to beat the system here, I'm just trying to stop it from beating me.

Thanks in advance for any help!