QI lived in my primary residence for many years. Because I was having marital problems, my father bought a condominium in his name for me to live in. After my divorce was finalized, the marital home was sold and I received a cash settlement of $200,000. My father then prepared a quit claim deed and put the condominium into my name. I lived there for more than two years and paid all of the expenses.

About three years ago, I bought a new house, and I have been renting the condominium since then. It has appreciated significantly. I would like to sell the condominium unit.

Is there any way that I can avoid paying capital gains tax on that sale?

A First, determine what your profit will be if you sell the unit. In your case, your basis for tax purposes will be that of your father. Let us say, for the purpose of this example, that he bought the condominium unit for $150,000, and made no improvements to the property. So his tax basis is $150,000. When he transferred the property to you, his basis became your basis. An important aspect of tax law is that the basis of the giver of property becomes the basis of the recipient.

Now, let us say the property is worth $350,000. Did you depreciate it when it was rented? If so, you may have to recapture this depreciation. But your gain -- your profit -- is $200,000. Under current federal law, you would have to pay tax on 15 percent of this gain, or $30,000. Additionally, you will probably have to pay a state capital gains tax as well.

There are a couple of ways that you can either avoid or defer paying this tax.

First, under current federal law, if you live and own your house for two of the five years previous to its sale, you can exclude up to $250,000 of gain. In other words, up to $250,000 (or $500,000 if you are married and file a joint tax return) is tax-free.

You state that you have been renting the property for a number of years. If you want to avoid paying the capital gains tax, and if you can make the arrangements and meet the statutory time limitations, you should consider moving back into the condominium, live there for two full years, and then sell it. It should be noted that the two years does not have to be continuous. If, for example, you owned and lived in the condominium for the year 2002, rented it out in years 2003, 2004 and 2005, but move in and live there during 2006, you may be able to meet the two-out-of-five-year rule.

You can also consider doing a like-kind exchange (also called a 1031 exchange, after the section of the tax code that covers it, or a Starker exchange, after a relevant court case. The condominium is a rental and thus meets the requirement for such an exchange. If you sell this property -- which is referred to as the "relinquished" property, you cannot have any access or control over the net sales proceeds. The money must be placed with an escrow agent, who is called an "intermediary." Within 45 days of the day you go to settlement on the relinquished property, you must identify the replacement property. You have the right to designate up to three such replacement properties. You can designate more than three properties, but their combined value must be less than 200 percent of the value of the relinquished property.

Then you must go to closing on the replacement property within 180 days from the day you settled on the relinquished property. All of the sales proceeds from the first property must go directly into the purchase of the replacement property. Otherwise, you will have to pay tax on any money which you take away from the first sale.

Thereafter the basis of the relinquished property essentially becomes the basis of the replacement property, and you must use that figure to claim depreciation credits or figure capital gains when you resell it. This is one drawback to a 1031 exchange. Another possible drawback is that the replacement property must be used for investment property -- at least for a year or so. Do you really want to be a landlord again?

The advantages, of course, are that instead of paying the IRS the capital gains tax, you can plow those funds into another investment property.

But in the final analysis, the decision is yours to make. It might also make sense to pay the tax and pocket the rest of your sales proceeds.

Benny L. Kass is a Washington lawyer. For a free copy of the booklet "A Guide to Settlement on Your New Home," send a self-addressed stamped envelope to Benny L. Kass, Suite 1100, 1050 17th St. NW, Washington, D.C. 20036. Readers may also send questions to him at that address.