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

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.

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

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.

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.


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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About the Author

Joel S. Hinckley has many years of experience in both commercial and residential real estate and is a published author on the topic of 1031 exchanges and Tenants-in-Common investing. Hinckley has been involved in numerous successful start-up business ventures and is an expert on Marketing, Strategy, and International Trade and Finance. He earned his MBA from the University of Pittsburgh. He is currently working as COO of a real estate valuation company.

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