Is a 1031 Exchange AND 121 Exclusion Possible?

[Matt E.]

My wife and I bought a property 50/50 with my In-Laws. We bought it in September '13, knowing we would sell it to an interested home builder. The property sits on several acres.

I have read of scenarios where you can claim a percentage of the property as your primary residence to reap the benefit of the 121 exclusion ($500K Exemption), and the other percentage as investment property to earmark for 1031 exchange. This seems to work with farms and ranches.

My question would be, can my wife and I take residence in the house for two years to claim the 121 exclusion, and turn the remainder of the property into a working farm or ranch to claim it as investment property eligible for 1031 exchange?

It would pencil out like this:

Sales Price: $3,600,000

Basis: $600,000

Net Gain: $3,000,000

Our Share (50%): $1,500,000

121 Exemption: $500,000

1031 Eligible: $1,000,000

Primary Residence: 33.33%

$$ Producing Land: 66.66%

We now have the property under contract with a home builder. Escrow is 24 months to allow for completion of zone change as well all city approvals. This gives us just enough time to hit the 2 year rule for the 121 Exclusion.

Any thoughts??