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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?
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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.
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?
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