Combining Section 121 and 1031

[Tyler Prosser]

Hello,

My parents have a primary residence purchased for $45k. Recent comps in their neighborhood are in the $1 million range. Even with a exclusion of gain under Section 121 (MFJ: $500k), they are looking at over $100k in taxes from a sale. They are interested in turning the primary residence into a rental property for a couple of years and then performing a 1031 exchange.

I have read through Rev. Proc. 2005-14, which pertains to the joint application of Sections 121 and 1031 to the transaction of a single property that qualifies for both Sections. However, I'm unclear as to what the total fair market value of the replacement property need to be assuming a $1 million sales price and application of the 121 exclusion. Going to meet with a CPA but any input would be appreciated, thank you!