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"But the transaction costs are the same whether the personal residence exemption is used or not."

There are no transaction costs if the house isn't sold. BTW, I understand that every state does not exclude the cap gains on the residence. Is that true, or have all 50 gotten around to doing so? If his state taxes cap gains, there goes more money.

"And in this case I still [think] the the investment is a dog."

I was making no comment on the desirability of the investment. There are too many factors to consider that are unique to the investor, his overall portfolio, long term goals, psychological makeup, etc for me to comment on that.
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