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inparadise wrote:
<<<<In about 5 years we hope to move back to the townhouse. If we live in it for two years, will this establish it as our primary residence, allowing us to then sell it and take advantage of the $500K capital gains waiver for a primary residence? >>>>

"Your plan should do you fine assuming the law doesn't change (wch I think it won't, seeing how popular it is--I think there would be some sort of riot if it changed now). As long as it is your primary residence (wch means in actuality--not just what you tell people--you actually have to consider it your home) for two out of the five years before you sell it, you can take up to $250,000/owner in gains tax-free."

I disagree slightly. You will, IMO, still need to recapture depreciation from the time when the townhouse was rental property. You may wish to ask on the Tax board for a real pros take on the issue.

Regards, JAFO

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