Yes. The capital gains tax allowance is for a home that was used as a principal residence.

I meant that spamming comment to go to Uribra.. sorry! Anyway you would not have to pay tax if you buy another investment property with all of the money, and only the portion you keep would you owe any taxes on(minus any costs not already taken off on taxes in previuos years). This is if you do both things within the same calendar year. If you sold a property in 2006 you do not have much time to close on another one in 2006. Good luck, and too bad the other answer seems wrong to me. They are not considering the rest of your q that you are re-investing in another property. Good luck. This works in Illinois! And with the feds. Edited from here down............................... I just noticed it would be your second home in your question as if you will live in it. This does not detract from it being an investment. If you are worried about that, then rent it out for 6 months. (or put it up for rent, weather it is rented or not-it can be a high enough price if you don't want it rented). (why not rent it while you are not there, even a week/mo. at a time?)

If you perfect a 1031 exchange with the use of a Qualified Intermediary, then you would be able to defer the capital gains tax on the sale of the investment property when you reinvest those proceeds into another investment property. Section 1031 of the IRS code allows the taxpayer/investor to defer capital gains tax on the sale of an investment, income, or business property when the proceeds from that sale are used to purchase another investment, income, or business property - see the IRS's website here: http://www.irs.gov/businesses/small/industries/article/0,,id=98491,00.html A second home, such as you are talking about purchasing, can be considered an investment property for the purposes of a 1031 exchange, but there are certain things you must do: (1) hold the second home primarily for investment purposes (2) treat the home as an investment asset on your tax returns (3) offer the property for rent at a fair market rent (the previous answer said you could hold it out for rent at a high rate so no one would want to rent it, but this could possibly cause problems with the IRS and viewing it as an investment property) (4) the first year after purchasing the home as part of your 1031 exchange, use it minimally (i.e., <14 days that first year). These four items are suggestions about how to best treat your second home as an investment property so that you can use it as a purchase of a 1031 exchange. There are no hard-written rules in Section 1031 about vacation homes, but the 4 items I mentioned above are what has been excepted in the past for second homes as part of 1031 exchanges. For more info on 1031 exchanges, you should check out http//:www.1031taxinfo.com - and it is really best to talk to a 1031 exchange professional about your situation because they are best qualified to strategize your exchange. I know http//:www.1031taxinfo.com offers free phone, in-person, and online consultations. Hope all that helps.

http://www.1031taxnfo.com