There’s even a way to make this work if you own investment property that isn’t a house.

For example, let’s say you're married and own a commercial office building that you lease to tenants. The building was bought for $200,000 many years ago and has been fully depreciated. You're thinking of retiring and moving to Florida and you’d like to unload the office building. Here’s a four-step plan to maximize your profits:

  Step 1. Exchange your property, tax-free, for another commercial property, under Section 1031 of the tax code. To do so, you sell your office building and have an unrelated "accommodator" hold the proceeds in an escrow account. You still have to pay capital gains tax on investment property and vacation homes.

  Step 2. Under a Section 1031 exchange, you have 180 days to use the money to acquire another property. Although this must be investment property, it doesn’t have to be another commercial office building. Suppose you net $250,000 from the office building sale. You can use that $250,000 to buy a nice home in Florida, which you proceed to rent out.

   Step 3.   According to the American Jobs Creation Act of 2004, a rental residence acquired in a Section 1031 like-kind exchange must be kept as a rental residence for at least five years before it is converted to your principal residence in order to be eligible to claim the home sale gain exclusion upon the sale of the property. This affects sales of principal residences that occur after October 22,2004. Once you have satisfied the five-year rule you might want to put your current home on the market. As long as it has been your principal residence for the past two years, you’ll owe no tax on up to $500,000 worth of gains. 

  Step 4. After you’ve rented the Florida home for the required five-year period in order to establish it as rental property, you can move in. Even though you acquired the house via a tax-free exchange, converting it to residential use doesn't trigger the deferred gains under current law.