To get the tax break you must either sell your home or do a 1031 exchange. The exchange is the way to go if you are wanting to have a large homestead. On the monies that you do not spend in the 1031 you will be obligated to pay capital gains. Capital gains aren't really all that bad if you want to get out of debt. The federal portion of on capital gains will be 15 %. In some state you will also have a state obligation. I really like the 1031 setup. It has enabled me to greatly increase my holdings. Sell the lot on the 1031 exchange, then sell the home. Otherwise sell the entire property as your home and run with the money taxfree. Be certain that you acquaint yourself with the rules regarding the 1031 so that you do not get disqualified.