You can defer tax on a homes appreciation by using the like-kind exchange rules found in Section 1031 of the IRC. These rules allow business or investment property to be traded free for other business or investment property. Any potential gain is deferred until the replacement property (the property acquired in the exchange) is subsequently sold. For the exchange of a principal residence to qualify, it is necessary to convert the home to business or investment property.
Example: Lets say a single home owner purchased a home for $200,000 that is now worth $2 million theres a potential gain of $1.8 million. The home owner can refinance the mortgage to pull out cash up to the equity of the home. Typically, mortgages are offered on up to 80% of the value of the home after factoring in repayment of any outstanding mortgage. Assuming this home owner has no mortgage, he/she obtains $1.6 million cash (80% of the $2 million value) by taking a mortgage on the home. Some or all of the money is then used to purchase a new home. Then he/she rents out the old home, thus converting it to investment property. After a time typically a year or two to establish the home as an investment property when the home is worth, say, $2.2 million, he/she exchanges (details below) the now rental property for another like-kind property. This could be a strip mall, office building, other rental housing, or any other investment property worth at least $2.2 million. The like-kind requirements are met because he/she is exchanging rental real property for rental real property. The homeowner pockets no cash (remember that at least $1.6 million mortgage must be obtained on the replacement property and the remaining cash must be used to acquire the replacement property when the home is exchanged) and owns rental property worth $2.2 million or more. And, there are no current taxes on the deal!
You can defer tax on a homes appreciation by using the like-kind exchange rules found in Section 1031 of the IRC. For the exchange of a principal residence to qualify, it is necessary to convert the home to business or investment property.