Question: I purchased a condominium in a college town three years ago. My daughter lived in this condo, and we rented two rooms to her friends. I now have an opportunity to sell the property for considerably more than I paid for it. I intend to reinvest in another rental property closer to home.

Since my daughter was claimed on my taxes as a dependent, can I claim all or a portion of the condo as a family residence, since doing so would allow me to avoid paying capital-gains taxes on the increase in the property's value? My daughter lived there rent-free.

Also, what if I reinvest the proceeds of the sale of that condo in another property? Can I avoid capital-gains taxes that way?

Answer: Property owners are for the most part exempt from paying capital-gains taxes on their primary residences. But that rule, alas, won't help you: To claim a property as your primary residence, you have to live there yourself. So trying to avoid capital-gains taxes on a property that's occupied by your daughter won't work.

That said, you still have some options if your goal is to avoid paying capital-gains taxes right away. You can do so through a "like-kind exchange," in which you effectively remove yourself from a real-estate transaction so that no cash ever touches your hands. For example, say you sell the property your daughter occupies and buy another, slightly more expensive investment property down the street. You could arrange a simultaneous exchange, in which you never touch any of the money, or you could hire an intermediary who would handle all the payments. The key is that you would not be able to pocket any proceeds from the sale.

The advantage in this scenario is that the capital gains from the first property would get transferred to the new one, allowing you to defer your tax burden. Consider the following, more detailed, example. First, you buy a condo, to be occupied by your daughter, for $150,000. Five years later, you sell the condo for $200,000, giving you a gain of $50,000. Then, you buy a $250,000 condo down the street. With a like-kind exchange, the $50,000 gain from the first condo would get transferred to the second property, allowing you to put off paying any capital-gains taxes.

"This is a tremendous break for the real-estate industry, which does this all the time," says Gerald Marsden, a partner at Eisner & Lubin, a tax-consulting firm in New York.

But you'll still have to pay the taxes eventually, after you sell the second home. Say you sell the second condo five years later for $300,000, giving you another $50,000 gain. To figure out your total tax exposure, you'd have to add that $50,000 to the $50,000 you transferred from the sale of the first house, meaning you'll pay taxes on a total of $100,000.

Or possibly not, depending on what you do with the second property. Although like-kind exchanges are designed for investment or business properties, it's possible you could later move into the second condo. Under current rules, if you live there for two years, you would be able to claim that property as your primary residence. While the rules on this kind of scenario are vague, some experts say it's possible that making the second property your primary residence could exempt you from some or all of your accumulated capital gains, including the $50,000 you brought over from the first property.

Determining whether a like-kind exchange will work out for you, however, could take some careful thought. Jerry Williford, an executive director in the Charlotte office of Grant Thornton, an accounting and business advisory firm, notes that capital-gains taxes are unusually low right now, giving you at least some incentive to consider biting the bullet and paying the tax now. Indeed, if you decide to go with a like-kind exchange, you could find yourself paying a higher rate for all your accumulated gains when it's time to sell the second property. In addition, he says, there could be transaction costs involved, including a fee to hire an intermediary. (Often, these intermediaries are subsidiaries of title companies.)

Given those uncertainties, you might consider another, albeit extreme, option to reduce your taxes: Hold on to the condo your daughter is living in and move in yourself. After two years, it will qualify as your primary residence, allowing you to escape the capital-gains tax.

For more information about a like-kind exchange, also known as a "1031 exchange," check out this website: http://www.1031help.com.

-- Mr. Barta is a staff reporter for The Wall Street Journal. His "House Talk" column appears every Friday exclusively on RealEstateJournal.com. Click here to e-mail him your questions about the residential real-estate market. Please include your first name and city and state. If your question is answered and posted, we will show your first name and city.