You will pay capital gain taxes on the difference between your basis (what you paid for it ) and what you sell it for. Any improvements, costs of buying and selling are also added to what you pay for it to up the basis.

The gain on the sale is not one of cash, but actual cost versus sales price. In your instance, the sales price will be $500,000 less any costs.

Unfortunately, what you propose won't work.

It may make more sense if you understand that the sales price is not just what you get in cash, it also includes any debts assumed by the buyer and anything you get in trade (like stock or other property). So the capital gains in your situation would still have a capital gain of $300K. But don't forget, what you paid for the property is not your entire "basis" (cost in the property). Your basis includes the cost of the property, closing cost on purchase, improvements made, and closing costs on the sale that you pay are all included. This will shrink your gain. Also, as long as you own the property for at least one year you get long term gains (assuming Congress doesn't screw that up too!).