Substantial tax savings can be reaped on the sale of a highly appreciated principal residence when you can combine the home sale gain exclusion and Section 1031 like-kind exchange breaks. To cash in, a former principal residence must be properly converted into a rental property; then it must be swapped for replacement property in an exchange, as described in the main article.
This strategy can’t be done overnight. Without explicitly saying so, IRS guidance on like-kind exchanges has apparently established a two-year safe-harbor rental period rule. A shorter rental period might work, but it could be challenged by the IRS.
Time is also limited on the rental period. That is, a former principal residence can’t be rented out for more than three years after you vacate the premises. To qualify for the home sale gain exclusion, a property must have been used as the taxpayer’s principal residence for at least two years during the five-year period ending on the exchange date.