Legal Question in Real Estate Law in California

No, your impression is not correct, at least as you state it. Anyone is free to sell their income property and do as they please with the proceeds, BUT there will be tax due on the net increase in value. You may be mixing this up with the possibility of doing a non-taxable exchange......under certain conditions, one may legally avoid paying the capital gains tax by re-investing the net proceeds of Property X into Property Y. The properties need to be of the same kind, e.g., residential income property. Look up as "1031 Exchange."

Selling your income property and using the proceeds to reduce the mortgage on your residence works something like this. If you paid $110,000 for the condo and have made $10,000 of long-term improvements to it, you have a tax base of $120,000, less any depreciation you have taken. If you sell for $175,000 after commissions, you'll have a taxable gain of $55,000, to which you must add the depreciation taken.......let's say $16,500.......for a total taxable gain of $71,500. The current capital-gains tax rate is 15% for most taxpayers, so you'd pay tax of $10,725, not too bad on a $175,000 sale.

Calculating taxes and giving tax advice is not my specialty, so please consider this as only a very oversimplified example. A tax advisor could give you particulars. You probably don't want to do a tax-free exchange if you want to cash out.

Remember also that the mortgage payments you are making on your primary residence are tax deductible, and if you pay off the mortgage or reduce the principal balance, you'll lose some deductions.

Finally, I believe financial advisers do not always recommend using sudden big cash inflows like inheritances and proceeds from the sale of property to pay down or pay off your home mortgage. Before doing so, you may want to get personalized advice from a financial planner, and by all means find out in advance from your mortgage lender what a large payment will do (if it doesn't completely pay off the loan) -- will it reduce the dollar amount of your payments, reduce the number but not the size of each payment, get you a better interest rate, or what?

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