How to Convert Rental Property to a Principal Residence for Capital Gains

Written by joel s. hinckley
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How to Convert Rental Property to a Principal Residence for Capital Gains
Converting investment property to a primary residence can create a significant tax savings. (Jupiterimages/Creatas/Getty Images)

Capital gains tax can be a significant burden when selling an investment property. One way of reducing or eliminating your capital gains tax liability is by converting the investment property into a primary residence in order to qualify for the primary residence exclusion of £162,500 for individuals or £325,000 for couples filing jointly.

Skill level:
Moderately Easy


  1. 1

    Convert your investment property into your primary residence by moving into it and living there.

  2. 2

    Live in the converted property for a continuous period of two years. To qualify for the exemption, you also must not have already used the exemption during the past two years.

  3. 3

    Sell the property, and do not report the exclusion unless the amount of capital gain exceeds the limits for an individual or couple, depending on your situation.

Tips and warnings

  • Theoretically, this is a process that can be used over and over again in two-year cycles.
  • It is important that you have a paper trail evidencing that your converted property is indeed your primary residence. In the event of an audit, you will need to produce bills to that address and other evidence that satisfactorily establishes it as your primary residence.

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