If you make a 1031 exchange a residence after renting for 2 years and later sale the property as a residence, do you pay the defered income from 1031 at the time of sale?

[sjrcpa]

How much later after making the 1031 exchange did they sell the now principal residence?

[Hiker285]

They keep it for the required 2 years.  Do they recapture depreciation taken while a rental property?

[sjrcpa]

In this situation they were supposed to hold it for 5 years after the 1031 exchange.

The deferred gain is taxable. 

[Hiker285]

If they hold it for 5 years is the deferred gain still taxable?

[Just-Lisa-Now-]

Deferred gains will eventually end up taxable, youre deferring the taxability, not excluding it.

[sjrcpa]

If the replacement property now principal residence is held for 5 years after the exchange, it is eligible for the Section 121 exclusion, assuming all other criteria are met. Gain to the extent of prior depreciation will be taxable.

[Hiker285 · Accepted solution]

So the initial 1031 deferred gain will not be taxed until she sales the property as a personal residence.  Then she will have to pay tax on the recaptured depreciation and exclude the capital gains as a personal residence except for the portion of rented years to total years owned.  If she owned the property for 15 years and lived in it for 5 years, she would have to exclude 66% of the $250,000 plus be taxed on recaptured depreciation?