Q: My husband and I recently sold a home in a very small Midwestern town.

The house was our primary residence for four years before we started renting it out.

We purchased the home for $6,050 and made considerable improvements (for which I have receipts) before selling the home for $17,600.

The sale came about quickly, and we didn’t do our homework on our investment options before we sold. We aren’t planning on buying another rental house — maybe just some land or stocks and bonds.

Are we restricted in what we can buy with the proceeds from the sale? Do we have to buy another rental property, or could we invest however we choose? Also, would one type of reinvestment save us tax money in the long run?

A: First, I’m not sure you even owe taxes on this investment. If you lived in the house as your primary residence for two of the past five years, you would be able to keep your profits tax free.

If I assume that you lived in the house 15 years ago, and it has been rented for the past 11 years, you would owe long-term capital gains tax on the profit. But if you have made extensive repairs and improvements to the property (and you don’t specify how much you spent), it’s entirely possible that the cost of those improvements would equal $11,000, and once you subtract those out, plus the costs of the sale itself, you also wouldn’t owe any taxes because you technically wouldn’t have any gain.

Finally, if you were trying to defer gain, you would have to identify a replacement property within 45 days of closing on this property and do a 1031 tax-free exchange. You would need to close on the new property within 180 days of closing on this property. But without much, if any, capital gains to shelter, a 1031 seems like a waste for you, because it will cost you something to set up. In terms of investing the cash, there’s nothing you can do to save on future capital gains taxes unless you buy municipal tax-free bonds of some sort. Or, I suppose you could buy another property and move into it for two years, and then sell it.

I’m still amazed that in 2005, it’s still possible to buy a home for less than $20,000, given that the average price of a house nationwide now runs about $200,000.