Sell or hold my residence

[Michael Clardy]

My wife and I own a house in California in which we have about $800K in equity.  However, in the twenty years we have owned the property, it has been rented out for 8 years.  We recently moved back into it as our primary residence.  My understanding of the capital gains exemption is that we would only be able to take a percentage  (12/20) of the $500K exemption once we live in it for another two years.  

We would like to buy a house out of state in which we would eventually retire. We would rent that house over the next ten years and then move into it once we retire.

We are trying to figure out if we should: 

a) reestablish our current hourse as a rental and then do a 1031 exchange

b) Stay in the current house for two years and sell it to buy the retirement home

c) sell in the next year without regard to the capital gain exclusion

d) ?

I would appreciate any insight into how to best use the equity in the current house to set ourselves up for a comfortable retirement.

Thanks.

[Bill B.]

NP. I only wanted to clarify that almost everyone who mentions their equity means “cash after paying off their loan”, not their gain. (If you put 20% down on a $1M property. You have $200k in equity but you’ll have a taxable LOSS after selling for $1M or even $1.05M. 

As I mentioned my only question would be something hopefully Dave or someone else can answer. Does it need to be converted back in to a rental after your 2 years to qualify for a 1031?