Intriguing idea: Fortunately, there is a way you can combine the home sale with a like-kind exchange. In other words, you could convert the home to a rental property before you sell it. As long as you meet all the tax law requirements, you qualify for this tax-saving parlay.

The IRS recently approved the technique in Revenue Procedure 2005-14. Let’s quickly review the two tax breaks:

*If you have owned and used your home as your principal residence for at least two of the last five years, you can choose to exclude up to $250,000 of gain from tax. The exclusion is doubled to $500,000 for joint filers. This tax break can be used an unlimited number of times.

*If you own business or investment property, you can arrange to exchange it tax-free for other “like-kind” property. Any “boot” received in the deal, such as cash or assumption of a mortgage, is currently taxable. But the boot is taken into account only to the extent it exceeds any gain under the home-sale exclusion.

Of course, your basis in the new rental property must be adjusted to reflect the exchange. Your adjusted basis is equal to the relinquished property plus the exclusion amount. In effect, the amount excluded under the home-sale tax break is treated as gain on the exchange. This effectively increases the basis of the new property.

Example: John bought his primary residence years ago for $210,000. He starts renting the home this year. After claiming depreciation deductions of $20,000, in two years John swaps the home for a condo he plans to rent and $10,000 in cash. The fair-market value of the condo is $460,000 when the properties are exchanged.

The adjusted basis in the old home is $190,000 ($210,000 cost minus $20,000 depreciation), so John realizes a gain of $280,000 ($460,000 value plus $10,000 cash less $190,000 basis).

Tax payoff: Under the 2005 ruling, John first collects the $250,000 exclusion amount tax-free. Then he defers the remaining gain of $30,000 (including the $20,000 attributable to depreciation) as a like-kind exchange. Although he is receiving $10,000 in boot, John does not have to pay any current tax because it does not exceed the amount of the excluded gain. Finally, John’s adjusted basis in the condo is $430,000 ($190,000 plus $250,000 excluded gain minus $10,000 cash received).

To ensure that your transactions comply with all the tax rules, obtain guidance from a professional tax adviser.