Hi z8grandma! We just sold a rental and I tried very hard to find a way to minimize our tax liability...unfortunately our situation was pretty cut & dried. We will be paying our regular income tax as usual and @15% Federal capital gains (plus state taxes on the gain as well - there is a benefit to living in Washington for you!) However, there could be a benefit to selling sooner over later...there was a capital gains tax relief bill passed a few years back and it is 'good through' 2008. Whether or not it helps in your particular situation will depend on your tax bracket. There are also ways to avoid the capital gains tax and keep the money in real estate without being a landlord. You might check out REIT's-Real Estate Investment Trusts and see if any qualify and TIC's-tenants in common, where you own a 'piece' of real estate. These can provide income which will be taxed at your regular rate and can preserve the 'principal' for your heirs if you desire and then the basis will be set at the market value when they inherit. If you were to decide to do a 1031 and live in the property to turn it back into a personal residence then you have to rent it for 1 year first and then live in it for 2. I'm not sure how that works when it is a vacation property. Disclaimer: this is how I understand it from my research, you should definately get professional advice and information if you are interested in any of these ideas!

I�m sorry I neglected to name the brand in my first post. I eliminated the one system that was only 14 SEER. The brand the second guy is pushing is Amana and I have included the models numbers for those systems in this update of the three proposals I�m considering. I live in MD. Both guys did a load calculation and checked the ductwork, etc. I am replacing inside and outside units, I am getting my ductwork sealed, and I am about to have a whole house energy audit done, but I have to get this heat pump ordered before I can do anything else! I just found out that the guy we�ve been using for 20 years, and who we have been very happy with, is not an authorized dealer for any brand. He is the one recommending the Bryant. I don�t know how this news should affect my decision? This is the first I�ve heard of electronic demand defrost! Here are the updated proposals: The first guy offers the following: Bryant Preferred Heat Pump, Bryant Preferred Variable Speed Fan Coil. � ARI Rating of 15.0 SEER with Certificate � National Average Operating Cost for this System is $1031/yr � Honeywell Bypass Humidifier � Manual J approved Load Calculation � Fully sealed ductwork (UL Listed foil backed tape) where we install � Recovery and Disposal of Old R-22 � Removal and Recycling of Old Equipment � New Outdoor Electrical Disconnect � UV Resistant Re-Enforced Plastic Pad � 6" Plastic Legs � Honeywell Digital Set Back Thermostat for Added Energy Savings � Clean Copper Line Set with Approved Cleaner � Honeywell MERV 10 Filter for Clean Indoor Air � � Five Year parts warranty � Five Year labor warranty � Ten Year compressor warranty The total cost of the installation is: $7,951 The second guy offers: System #1 Amana SSZ14 www.amana-hac.com/Home/Products/HeatPumpSystems/SSZ14Distinctions/tabid/641/Default.aspx - 14 SEER Condensing unit (outside) with single speed fan motor and high-efficiency Copeland scroll compressor - Air Handler (inside) with Variable Speed blower motor (brings system up to 16 SEER) and electric back up heat - New 25ft Line Set - Digital Programmable Thermostat - A new pad for your condenser to sit on outside - All Labor (includes disposal of old equipment) - Lifetime Compressor Replacement Warranty - 10yr Parts Warranty - 10yr Labor Warranty Total: $8,752 System #2 Amana ASZC16 ttp://www.amana-hac.com/Home/Products/HeatPumpSystems/16SEERASZC16/tabid/856/Default.aspx - 16 SEER Condensing unit (outside) with 2-speed fan motor and 2-stage Copeland UltraTech scroll compressor - Air Handler (inside) with Variable Speed blower motor (brings system up to 17 SEER) and electric back up heat - New 25ft Line Set - Touch Screen Programmable Thermostat - A new pad for your condenser to sit on outside - All Labor (includes disposal of old equipment) - Lifetime Unit Replacement Warranty - 10yr Labor Warranty - One Year Club Membership (Service Contract) - This system is eligible for $500 Federal Tax credit Total: $10,830

I think the suggestion to seek expert tax advice is sound, but I wanted to add something. On the strength of what you have reported here it would seem that you might be looking at nearly 109K of capital gains on the sale, less the cost of doing the subdivision which would include municipal fees, surveys, engineering studies, legal costs and anything connected with getting the land subdivided. However, I don't think it's as simple as that. When you paid 600K for the 85 acres it was a bulk purchase and it seems unlikely that all 85 acres were worth the same amount per acre. On a piece of property as large as that, there is bound to be land that is worth less per are (and therefore has a lower fair market value) because it was farther off the road, or had other development constraints. For that reason, the simple way of determining the basis value of each of the three subdivided acres: $600K divided by 85 (acres) times three, would not be accurate, and probably is misleadingly low. It may be that the land you subdivided was worth more per acre, even before it was subdivided. I suggest that you consider having the property examined by a qualified appraiser (not just a RE agent, unless he or she is also dual qualified as a certified appraiser) to help you determine what the true basis of the land you subdivided. To give a hypothetical example of what I mean: perhaps the three acres you sold were the only "view" lot, or had the only waterfront or access, or had some other very desirable feature of the overall tract. The remaining 82 may still have a decent spot for your new home but the rest may be overlooking the county dump and swamp land to boot. That's why each acre, or lot, needs to be looked at on its own merits, not just valued as if it was all equal. The subdivision almost certainly removed more than 3/85ths of the total value of the tract. A competent appraiser should be able to provide you with sufficient documentation for you to establish a correct basis, which will most likely increase the basis, and therefore reduce your capital gains tax liablity. But keep in mind what you reduce now will affect your basis when you eventually sell your house. However since presumably the new house will be your qualified residence, a large chunk of your potential capital gains will protected (assuming no change in tax code) at that point. HTH, Molly~

A "Starker exchange" was codified by the IRS. You may be looking to TIC exchange (Tenants in Common) governed by some fairly strict IRS regulations (although no SEC oversight as they are real estate investments not securities). You need to find a registered-rep to hook you up with a TIC Facilitator. This is the TICA website. Maybe you get in touch with them through the contact page and they can recommend a qualified intermediary (accommodator) or you can learn more about TIC exchanges? Hopefully the TICA association can direct you to someone in your general area and more information concerning your questions. If you decide to take the cash because you are wary, the tax rate is currently only 15%. Deferring tax on the gains by reinvesting may not be a wise move for you.