1031 Exchange to Rental then Convert to Primary

[Richard H.]

Hi I have searched for a bit and can't find an answer to my specific situation.

I am selling a rental property and would like to 1031 exchange the proceeds into a new rental property. If I do this and later decide to move into the new rental property (making it my primary) will the deferred taxes come due?

I have come across articles that seem to imply that if the replacement property is in service as a rental for at least 2 years I won't be in violation of the 1031 exchange rules and avoid paying the taxes. Not sure if I am interpreting this correctly.

Thanks for the help!

[Dave Foster]

@Bart H., There was much spirited discussion over this one recently.  @Nicholas Aiola and I were having this exact discussion.  

My understanding is that that all depreciation since 1997 has to be recaptured unless it is a primary residence that has been converted to investment and then depreciation in the last years after conversion but prior to the 121 sale do not have to be recaptured.  

The question that may still not be answered in this new tax era is that about the Investment turned primary turned investment with  a 1031 thrown in the middle.

So will the service go back to original use or last use.  Last use is consistent.  But never say never.

@Natalie Kolodij, You're the CPA go to on this thread.    Whatdaya think?