From 1031 Exchange to Primary Residence

[Paul Allen]

I am a financial adviser and some clients asked me this last night and I don't know the answer. Hoping y'all can help.

Clients own a home (SFR) in South Carolina. The mortgage is paid and it has been a rental property since 1994. Lots of capital gain and depreciation expense taken.

They are planning to retire to Florida in a few years. They have a SFR in Florida selected for their retirement. They wanted to know if they can do a 1031 exchange of their S.C. property for the Florida property now, use the FL property as a rental for a couple of years, and then retire to FL and live in the FL property.

I guess the real question is what are the tax consequences for converting your 1031 property into a primary residence?  Is there some minimum length of time it has to be a rental before converting to a primary residence can be done without immediate tax consequences?

Also, they live in VA, own a property in SC and want to exchange it for a property in FL. Where should their QI be? (Or does it matter?)

TIA.

[Brie Schmidt]

@Bill Exeter